Terwin Money Management LLC expects to close its first ABS CDO of the year - Northwall Funding CDO 1 Ltd. this month. The $300 million deal will be the fourth ABS CDO for San Francisco-based Terwin, all of which have been underwritten by Merrill Lynch.

At an expected, 86.5%, the deal has the highest concentration of subprime mortgage collateral compared with its three deals issued last year, according to Sam Rainieri, chief investment officer at The Winter Group, Terwin's parent. "There's been a lot of good demand for the paper," Rainieri said.

While the CDO market has seen an upward trend in residential MBS collateral in deals - some at 100% - this one has an unusually high concentration of subprime collateral, said one banker. Final pricing spreads will be an indicator of the sector's acceptance in the marketplace, he said.

Pricing for the Northwall CDO came in at 28 basis points over three-month Libor for the 3.5-year A1 senior class and 50 basis points over Libor for 5.5-year senior A2 notes, five and 12 basis points inside of last October's Glacier Funding CDO II, which had a 60.9% subprime RMBS concentration. The Northwall CDO is set to close on May 17. As of April 28, the highest-rated tranches of SF CDOs were trading at 30 basis points over Libor, according to JPMorgan Securities research.

About 60% of the capital structure, $180 million of floating-rate senior A1 notes, with $46.5 million of A2 paper, $40.5 million of double-A rated B notes and $18 million of triple-B subordinates, which priced to yield 7.546%.

Rainieri said the only subprime loan type the group won't touch are negative amortization loans, but is otherwise comfortable with the sector. Negative amortization occurs when loan payments do not keep pace with interest accumulated on the principal loan amount; the situation is most common among interest-only and hybrid adjustable rate mortgages. "I think residential real estate is in relatively good shape. I don't see any stresses," Rainieri said.

"The concentration of Terwin assets are unique, but that is the biggest difference [between this deal and previous Terwin deals]," said Alla Zaydman, an analyst who worked on the deal for Fitch Ratings.

Roughly 35% of the assets backing the deal came off of Terwin's books.

GreenPoint Financial Corp. announced in April that it made a "substantial equity investment" in The Winter Group and that its chief executive Richard Winter said would allow Terwin more access to collateral. GreenPoint was the biggest supplier of Terwin's mortgage collateral as of last year.

Copyright 2005 Thomson Media Inc. All Rights Reserved.

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