While the market might feel that moving toward a seven handle is a big shift to clear triple-As, according to one dealer, the real clearing level for synthetic IG CBO paper is in the 90 to 100 basis point range over Libor. "You can only stuff the primary market with triple-A synthetic CDO paper at 60 basis points over and then sell it to the next person a few weeks later in the secondary market at 90 basis points over for so long until someone gets upset," noted one buyer in the primary and secondary market.
"Selling triple-B CDO paper is like trying to get water from a stone, even CLOs," added one banker who is still making money in the sector. Many were not surprised to see that Lehman Brothers ripped out the triple-B rated tranche of the PIMCO IG CBO, Santa Rosa, and added an A2' rated tranche that priced at 250 basis points over Libor, the same level as recent triple-B prints.
On the other hand, the CDO primary still has premium value, as investors can buy in size and, should the investment go sour, at least they'll have the company of several others to share the misery of making the same mistake.
One source said that the Santa Rosa triple-As at 55 basis points over Libor is comparatively rich, considering Bear Sterns is bringing out a similar cashflow IG CBO, with its triple-A seniors at 70 basis points over Libor.
A block of December 1998-vintage Athena cashflow CLO triple-A's reportedly cleared in the secondary market recently at $0.98 on the dollar. The deal has a triple-C bucket that is 14% full (excluding $13 million in defaults). Morgan Stanley underwrote the transaction, but was not contacted in regards to the trade.
On recent IG CBOs, dealers are said to be long triple-As and most recently double-As, which in one recent deal, bonds were heard "in for the bid." In ABS CDO product, it was recently confirmed that AAM misfired on a DASH II equity payment and that an issuer currently in the market with a new SF CDO deal had "misfired" an equity payment as well.
In the pipeline, Capital Source has a $325 million middle-market loan-backed transaction via Wachovia Securities that has triple A's talked in the 55 to 60 basis point area over one-month Libor. The deal will be the largest mid-market transaction yet for the issuer. Capital Source's corporate finance group primarily focuses on providing senior and mezzanine loans to companies with private-equity sponsorship. Loans range in size from $1 million to $40 million.
Also, Credit Suisse First Boston is bringing the Bristol static, cashflow structured finance CDO for Vanderbilt Capital late last week. The $200 million triple-A rated A1 tranche is going entirely to one private investor. Meanwhile, a $20 million tranche is being offered with a triple-A wrap by CDC IXIS Financial Guaranty - a new entrant to the U.S. market. That CIFG tranche is offered at 53 basis points over Libor. The issuer and underwriter could not be reached for comment.
