Leveraged super-senior tranches of collateralized debt obligations which reference synthetic asset-backed securities figure to take flight as shops with significant mezzanine ABS inventory are eyeing the play as a way to offload senior risk from their books. "We have placed a decent amount of mezz and don't want to run ahead of ourselves and place more risk than can be managed," said an official at one European house.
Goldman Sachs closed the first leveraged tranche of super senior ABS last month in a private deal, according to market players. One player said derivative shops, including Morgan Stanley, Deutsche Bank and Merrill Lynch, are considering the trades to hedge ABS exposure and are expected to print before year-end. Officials at those three firms declined comment and Rebecca Nelson, Goldman spokeswoman in London, did not return messages by press time.
The firms are also keen to take advantage of investor demand for non-risky ABS and developing liquidity in the asset-class. "There is now a natural two-way flow in the ABS market," said an official at a U.S. house in London, adding, "The market is looking for more yield with ABS and is comfortable with leverage."
Analysts at the three major rating agencies reported a plethora of inquires for leveraged super senior referencing specific, rather than diversified, ABS portfolios. Perry Inglis, managing director and head of the European CDO group at Standard & Poor's in London, said he is working on six transactions which comprise portfolios of CMBS or RMBS and which feature spread-based triggers. The first will be rated within two weeks, Olivier Toutain, v.p. and senior analyst at Moody's Investors Service in Paris, said a lack of data on specific ABS spread movements and concerns about the liquidity of the assets has made rating the trades challenging, but that rating criteria remained the same as a corporate LSS deal.