Merrill Lynch nixed a constant proportion debt obligation it had been marketing since October due to changing rating agency methods and because spreads on the underlying indices have shrunk so much the economics of the deal changed. "It did not seem prudent to push through a transaction rated on what was becoming an obsolete model," said Paul Levy, head of exotic credit structuring in London.
CPDOs from ABN AMRO, BNP Paribas andLehman Brothers were marketed around the same time and closed when final ratings of AAA were assigned. Merrill, however, began marketing with provisional ratings before pulling the deal. Movements in spreads could have affected the stability of the AAA rating, explained a Moody's Investors Service analyst in Paris. The agency withdrew its provisional ratings for the deal Feb. 9. Merrill officials, however, pointed to impending rating methodology changes as the primary reasoning behind the pull.
The firm will work with the rating agencies as they revise their models and added that they would print a new deal at that point. Merrill officials declined to comment on details of what this deal might look like, but noted the firm is talking to several managers about a version of the original structure in addition to considering static bespoke single-name structures.
New methodologies for rating CPDOs are expected to be released from all three rating agencies within the next month.
