Grasping the brass ring of stable performance these days is as highly sought after as a World Series ring around Boston these days. But while no asset class is ever risk-free, the CBO market has been drawing a flock of investors in phenomenal numbers.
Lang Gibson, director of structured credit research at Banc of America Securities, says the movement is largely the result of stable performance of the collateral. According to Gibson, the multisector CBO market has become the single largest cash CDO subsector in the past few years. Also, subprime RMBS has seen exceptionally high issuance levels due to historically low interest rates and a healthy housing market.
In his recent research piece Trends in Multisector CBOs: Subprime Collateral and High Grade Structuring, Gibson states cash multisector CBOs have grown their market share from 20% of global cash CDOs in 2002 to roughly 50% in 2003, and reports an estimated volume of $27 billion for the year. Visual synthetic issuance this year exceeds $121 billion notional across 38 deals.
Collateral reference pools have had an increasing portion dedicated to subprime RMBS – not all that surprising as the supply of mezzanine SF collateral carrying attractive spreads has been largely concentrated in subprime RMBS.
Gibson pointed out new structural technology has reduced CDOs’ cost of financing, enabling managers to leverage more senior-rated and stable tranches of SF collateral. The synthetic market has benefited by leveraging excess spread through cheaper, super senior funding. Lower yielding triple-A and double-A collateral pools are made possible by allowing CDOs to access the cheaper sources of funds.
While Gibson states the supply of securitizable subprime collateral is expected to decline as interest rates ascend, the multisector CBO market will increasingly rely upon the high- grade multisector CBOs – securitized senior-rated SF collateral – to maintain its current growth trajectory.
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