Bear Stearns has launched what it and even rival dealers are calling the first third-party pricing tool for collateralized debt obligations of high yield debt, something it believes can lead to an increase in secondary market activity.
One CDO collateral manager CDO says it may fill the need for third-party analytics. "We do it on our own on a deal-by-deal basis, and it's a lot of work. So, to the degree that you can have a third-party like Bear Stearns do this and you can focus more on other stuff, this is absolutely a positive for liquidity," he says.
The new tool, dubbed Credit Adjusted Spreads, runs default scenarios on the underlying bonds and overlays it with the CDO capital structure to determine pricing, according to Gyan Sinha, head of structured finance research. He says it is similar to option-adjusted spread models common in the mortgage-backed securities market, but "instead of tranching up prepayment risk, you're tranching up credit risk." To start, the tool will only be used to evaluate CDOs backed by junk bonds, though it may be extended to investment-grade CDOs.
Banc of America Securities and Standard & Poor's said earlier this month they were working together to develop a similar model but that product is still in development.
A head of CDO research at a bulge bracket firm agrees that Bear Stearns "is doing a good job of leading the charge." However, he couldn't resist a slight jab. "If there is a certain irrelevance to it, it's that it's a tool to value a sector that is diminishing in importance to the CDO market," he says, noting that structured finance CDOs are the new wave and hardly any new high-yield deals have been done in the last year-and a-half.