The TABX index began trading Feb. 14 at spreads much wider than a number of market players had anticipated. While not as shocking as, say, Britney Spears' new buzzcut, aside from structural differences, the trend in the TABX so far could indicate that investors place quite a bit of value in a CDO manager's ability to handpick good credits and trade out of bad ones. The implied triple-A tranches of the TABX came out of the gate pricing north of 100, double-As between 600 and 800, single-As between 1,400 and 1,800, triple Bs at nearly 2,000 and double-Bs between 2,000 and 3,000 basis points, according to JPMorgan Securities analysts, who described the pricing divergence against the back of mezzanine SF CDO spreads as "almost shocking."
"Managed cash CDOs get a lot of credit for diversity, infrastructure, selection, and surveillance," Deutsche Bank analysts said in a report last week. As of Wednesday, the triple-B-minus 0% to 5% was trading two points below the Feb. 16 close in the $30 range, while the 40% to 100% tranche was trading five points below, in the $92 range, according to Credit Suisse.
The TABX essentially tranches triple-B and triple-B-minus rated securities from the second and third series of the ABX, with attachment points designed to emulate triple-A through equity CDO tranches. In contrast to most mezzanine CDOs, the TABX portfolios are static, meaning there is no manager available to trade in and out of securities. There are also only 40 reference obligations in each the triple-B and triple-B-minus TABX portfolios, compared to as many as 200 in a typical mezzanine CDO. Other differences include - but are not limited to - the lack of performance triggers and excess spread, along with the fact that collateral losses are applied, as they happen, from the bottom of the capital structure up.
While CDO players cringed at the thought of having new issue spreads tied to moves in the TABX, many still believe they will receive some punishment from volatility in the index, which they say is still the closest thing to a benchmark product that exists. It's unclear where TABX spreads will settle though, sources said, as many were still trying to work through modeling kinks and liquidity issues.
The first week of trading was hectic, with some portraying it as a "free for all." Observers described a rather eclectic mix of participants - from the so-called "old school" crowd, involved because of their knowledge of the underlying collateral, and the derivatives crowd, looking to spice up their books with a new trade.
The tranches seeing the most activity are the equities and two senior tranches, according to Credit Suisse. Not surprisingly given the trend in the ABX, most activity was focused in the triple-B-minus piece.
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