CDOs

The season might be changing, but it won't be enough to lighten the heavy mood that has held the European primary market deal flow at a standstill for much of the year.

The tenth series of the North American Investment Grade CDX index (CDX.NA.IG.10) launched into a slightly rosier-than-expected market last week.

The registration for American Securitization Forum's ASF 2009 opens tomorrow, March 28. The conference will be held Feb.8-11, 2009 at The Venetian in Las Vegas. Online registration can be done through the ASF Web site at http://www.americansecuritization.com/story.aspx?id=2282

With JPMorgan scooping up 85-year-old Bear Stearns last week for $2 per share, it is safe to say that deteriorating credit conditions and market jitters continue to hack away at the U.S. economy.

Banks and insurance companies that issue trust preferred securities are now highly sensitive to financial institution risk and have acquired a distaste for the CDO structure, which has pooled these securities.

XL Capital Assurance's (XLCA) parent company Security Capital Assurance (SCA) responded to a lawsuit filed yesterday in New York by Merrill Lynch, accusing XLCA of refusing to cover losses on $3.1 billion in seven CDOs that the company had written swaps on. SCA said that it had terminated XLCA's contracts with Merrill Lynch due to a breach of contract in the obligations by promising control rights in the investment to various parties. "Merrill had repudiated its contractual obligations to XLCA by committing to provide one or more third parties with the same CDO control rights that it had previously promised to XLCA." As a result, SCA said that is in not obligated to make these payments. Quinn Emanuel Urquhart Oliver & Hedges will represent SCA in court.

Ambac announced that it has completed its $1.5 billion equity offering and is working to restore market confidence, said John Uhlein, executive vice president at Ambac Financial Group.

UBS urged financial market regulators to "take an active role," in rating agency selection as part of an effort to save these firms, in a research report last Tuesday.

The Information Management Network's 12th annual U.S. CDOs, Credit Derivatives and Structured Credit Products conference in New York opened last Tuesday with panelists speaking bluntly about current CDO market conditions. They also made forecasts about future deal structures.

The role of the CDO manager has been called into question lately as market participants have suggested that investors are bound to favor static deals.

Markit is gearing up for the launch of the iTraxx LevX Series 2, the second installment of the credit default swap index referencing European corporates. The new series is set to roll on March 17. There will be a pricing call on March 14, which is when the coupon levels are determined. On a conference call this morning, Markit officials announced that the new series includes a number of changes from Series 1, which originally launched in September 2006. Most notable among the changes is that both the senior and subordinated indexes of the LevX Series 2 will now have non-cancellable contracts, or "less cancellable," according to David Geen, general counsel at the International Swaps and Derivatives Association, who spoke on the call. The intention on the non-cancellable contract is that when there is a refinancing, the contract will reference the facility or facilities that refinance the original reference obligation. However, there are some situations where there is no suitable successor credit agreement but the contract will still cancel, Geen said. Another important feature in the Series 2 is the use of interim and final summaries related to successor credit agreements published by Markit. These will be used rather than determinations by individual calculation agents. The senior index will have 75 equally-weighted LCDS for first lien loans and the subordinated index with have 45 equally-weighted LCDS for second and third lien loans, as opposed to 35 equally-weighted names for both indices, respectively, seen in the Series 1. Series 2 will feature semi-annual portfolio rolls with quarterly coupons and a five year maturity, which is similar to the traditional iTraxx indices, Tobias Sproehnle, director at Markit said on the call. The reference obligations in both the senior and subordinated series are weighted the heaviest in cable, telephone companies and wireless with 16% of the total obligations in both indices, with General Industrials and Food and Beverage, making up 13% and 11%, respectively. Markit said it will be providing information on the reference data, including reference credit agreements and reference obligations, included in iTraxx LevX Series 2 for investors for free for thirty days. Dealers will not be redistributing the data, Markit noted.

The ABS market reacted to Ambac Financial Group's $1.5 billion common stock and equity offering last week with disappointment.

CDOs are on track to see a decline in issuance for the first time in six years. However, one small deal managed to get done. The proceeds of the deal will be used to build an interactive park in Puerto Rico aimed at teaching kids the benefits of recycling.

As litigations related to ABS losses mount in the U.S., European investors are beginning to show signs of similar uneasiness.

Credit rating agency Standard & Poor's elaborated on its previously announced plans to cut 172 jobs, saying it will dismiss about 30 of its structured finance analysts by month's end.

Despite the problems besetting its fellow bond insurers, Financial Security Assurance (FSA), the third largest financial guarantor, has been riding high.

ABS issuance slowed to a crawl since the last press time, yielding just a $1 billion Sallie Mae deal on Feb. 22, and a $180 million ratepayer-backed ABS last Thursday.

While one could hardly call the CLO market healthy, the rumors of its demise may be slightly exaggerated. It's not impossible to get a CLO transaction done, though a significantly easier time will be had by all if arrangers stay realistic about pricing and forget going the market value route, sources said. This market is going for cash.

Citigroup made news last December when it decided to consolidate about $49 billion in SIV assets onto its balance sheet. In its most recent 10-K filing, released on Feb. 22, Citigroup revealed that it had consolidated significant interests in CDO assets.

Citigroup announced last week that Brian Leach will assume the role of chief risk officer, reporting to Chief Executive Officer Vikram Pandit. Leach will also become acting chief risk officer for the institutional clients group.