A handful of arrangers are working with rating agencies to bring CDOs of CDO equity to the market, according to industry sources. The development comes on the heels of a number of structures that aim to redistribute the high yielding, but risky, CDO equity. "We are seeing an increased number of proposals for CDOs of CDO equity," said Mia Koo, a managing director at Derivative Fitch. The generally unrated and illiquid nature of CDO equity, along with a lack of historical performance data, present challenges toward achieving a rating - but they are certainly not insurmountable. The idea is similar in concept to a CDO squared structure, but repackages only CDO equity tranches. Proposals have ranged from just-off-the-run to seasoned CDO equity collateral.
Hedge fund Highland Financial Holdings is preparing to manage its first CDO. Credit Suisse is bringing the $1.1 billion Citation High Grade ABS CDO I. The deal is backed by a portfolio of RMBS and HE ABS, with up to a 17.5% bucket for negative amortization securities, as long as they are rated double-A-minus. The triple-A rated A-2 tranche of the deal priced at 43 basis points over three-month Libor, while the triple-B rated D tranche priced at 345 basis points over.