Forget yanking the wishbone - two CDOs were reportedly yanked from the market just prior to the holiday break. Investors, however, were still able to devour the collateral pool of one of the pulled deals.

Both of the disappearing deals, Cherry Valley I and Synthesis, were CDOs of CDOs. Their departure created a stir last week when posted on IFR Asset-Backed Securities, sources said.

At press time, the assets that had comprised Cherry Valley I were being liquidated wholesale. Once a $1 billion arbitrage cash flow CDO led by UBS, the deal was disassembled, and the collateral manager, UBS Principal Finance, was instead circulating a bid list of triple-A and double-A seasoned cash flow CDOs worth about $475 million. There was no word as to the success of the sale.

Spreads on the underlying collateral had tightened so much, keeping Cherry Valley intact didn't make sense anymore, a source familiar with the deal said. "[Principal Finance is] now out liquidating the assets and bids are due today," the source said at press time last Tuesday. (ASR moved up its press time because of the holiday.)

According to reports, just 9% of the deal was financed and the last known spread talk for $900 million of senior notes, carrying a 5.75-year average life, was heard at 39 basis points over Libor.

"It sounds like collateral tightened so much, they could make more money selling the collateral than doing the deal. That's good for the guys who own the collateral, but not necessarily good for the manager, because the manager doesn't get his fees," said another industry insider.

According to one market pundit not associated with the deal, the underwriter is unlikely to have lost out monetarily on the deal.

"The way I write my letters, if a collateral manager walks on a deal, then there's a cost breakage that they would owe back to me," said the sell-side source. "But there are a lot of moving parts... It depends on how far they are into the marketing period, what interest you did or didn't have."

Less clear was the fate of the $2.4 billion Synthesis CDO I, a CDO of CDOs managed by Links. Market sources report the deal is no longer being marketed, with spread tightening on sourced CDO assets apparently a significant factor. Reportedly, the top three triple-A rated tranches were all wrapped by MBIA. Given that a monoline's stamp on a vehicle generally equates to a gold star, it was a bit peculiar that Synthesis was pulled.

"It was a whole bunch of wrapped paper that they were re-wrapping... and they weren't offering enough spread," said one buysider who looked at the deal but passed.

The last word on spread talk for a $1.5 billion, 4.9-year, triple-A, A-1 tranche had been at 25 basis points over three-month Libor. It was 45 to 50 over for the $705 million,

7-year, A-2 tranche. A $135 million, 7.3-year, B tranche was heard at 100 over.

Some sources speculated the deal might reappear next year.

Into the pipeline

Investors, meanwhile, need not grieve over lost opportunity as two new CDOs hit the market. Additionally, another deal was reportedly upsized, and will potentially be the largest cashflow CDO seen all year.

South Coast Funding IV, managed by TCW Advisors Inc., was launched at just over $500 million in size. At press time, the Merrill Lynch-led deal had swelled to $850 million, sources said. If it indeed prices at that size, it would top the $725 million ACA ABS 2003-2 CDO which priced in October via UBS. There was no word on spread talk at press time.

Also hitting the market is a $303 million Deerfield Capital Management vehicle dubbed Knollwood CDO I. The $240 million, 6.8-year A class was talked at 65 basis points over the three-month Libor. Sources

also said Citigroup Global Markets started shopping around a Pacific Investment Management Co. leverage loan vehicle called Silver Creek. Talk on the $43 million, 8.9-year A class was at 80 basis points over Libor; a $52 million B tranche, with a 9.10-

year average life, was at 180 over Libor.

http://www.asreport.com

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