Collateralized debt obligation houses, including Bank of America and Deutsche Bank, are starting to offer single-tranche deals referenced to asset-backed securities. "We are starting to do this; it's a logical next step," said Mitchell Braselton, managing director and European head of global structured products marketing for BofA in London.
Structurers began marketing single-tranche deals referenced to corporate debt last year, but were not able to offer products referenced to ABS because the deals were too illiquid. In a single-tranche product the structurer sells one piece of the deal and then hedges the rest of the capital structure. This is only possible if there is a liquid underlying market or the firm can distribute highly correlated risk from other parts of the capital structure.
Investors have been turning their attention to CDOs referenced to ABS in recent months because of their increased stability in ratings and spreads compared to corporate deals. One European head of structured credit at a ratings agency estimated that half of the CDOs in the pipeline are referenced to asset-backeds. A Deutsche Bank official said it is this increased deal volume that has triggered the interest from the sell-side in single-tranche deals.