Leveraged super-senior trades - which are gaining popularity in the European market - are close to making a debut in the publicly rated U.S. synthetic CDO market, with at least one rating agency looking at five of the deals. The deals achieve their leverage, generally eight-to-12 times above the super-senior tranche, by posting only a portion of the collateral's notional amount but receiving the full spread. Further separating the leveraged super-senior from a senior synthetic CDO tranche, the arranger has the option to unwind the transactions and transfer mark-to-market swap costs to investors.
The trade has gained popularity in Europe as the aftermath of the "correlation unwind" reverberates through the market, causing tight pricing in mezzanine slices of the Dow Jones iTraxx CDS index sending investors looking for other options, according to Bear Stearns analyst Gyan Sinha. "For institutions looking to put high quality assets on the books and still pay a reasonable spread, taking market-risk through leverage is pretty much the only option left in the structured credit markets," Sinha wrote in research this month.