One World Investments Ltd., a Boston-based boutique asset manager, has stopped taking orders on the FSA-wrapped triple-A tranche of its $200 million CDO backed by 85% emerging market (EM) sovereign/quasi-sovereign bonds and 15% corporate debt. Arranger Links Securities has set the coupon on the One World Global Sovereign at 45 basis points over Libor with a discount margin of 50 basis points over Libor.
Making the deal palatable to investors is the fact there is zero percent Argentine debt in the reference pool.
Argentina's (B2/B-/B-) debt has fallen by at least 25% in the past two weeks on concern that South America's second largest economy is in its third year of recession, with the looming possibility of a default on the horizon. U.S. mutual fund investors have lost close to $500 million in the past two weeks, according to industry sources.
Assets backing the 144a-registered CDO include 69% speculative-grade debt, 21% of which is from Latin American countries, 17.7% Eastern European, and 13.7% East Asian, and 11% African. Thirty-one percent of the emerging market assets are investment-grade rated, with 8.5% originated from Latin American issuers.
What makes this trade unique is that it involves two relatively small shops that are new to CDOs. One World has two highly respected portfolio managers coming from Bank Boston, one of the biggest EM players in the world, and Links Securities's CDO platform started in January with four professionals.
Despite these challenges the triple-A tranche is reportedly 1.5 times oversubscribed and the deal is attractively structured. One World's first CDO closes on July 25th and has a legal final maturity in 2016. The single-A tranche is talked at 175 basis points over Libor with a 10-year weighted average life (WAL) and the triple-B is talked at 300-310 basis points over Libor. Supporting the debt classes is $30 million in preferred shares, 15% of the total deal.
Two key marketing points on the deal are the rating factor/diversity score and a cash diversion trigger to protect the debt holders. Sources said One World
Global Sovereign has a higher diversity and a lower rating factor than comparable EM CDOs: a rating factor of 1543 and a diversity score of 45. A lower rating factor reflects a higher average rating (e.g., Rating factor of 1350 reflects Ba2 rating, 1780 reflects Ba3, 2220 reflects B1).
The deal also incorporates a reinvestment diversion test. This test, when triggered, diverts interest cash flow away from equity to be reinvested in additional collateral to build up the par value of the pool. This feature is not used on many deals (maybe 10% of deals) and is a benefit to bondholders (at the equity holders' expense).
The test is performed similarly to a par-value test, which measures the amount of overcollateralization in the deal (par value of the collateral - adjusted for defaults and credit risk assets - divided by outstanding debt).
When the test is not satisfied, 50% of the interest cash flow that would normally go to the equity is reinvested in new collateral, which serves to increase the overcollateralization. It is expected that the trigger will be set at the portfolio's initial overcollateralization level; the ratio at close is 121%and the trigger is 118%. Therefore, any defaults or credit-risk assets will trigger this feature.
