Leveraged super senior tranches of asset-backed security collateralized debt obligations are being structured with new trigger events. This is being driven by dealers looking to better hedge the structures. Spread-loss triggers and implied write-down assumptions are being pitched along with traditional weighted average factors, realized losses or mark-to-market value changes.
WestLB is among the first firms pitching new triggers. It is marketing a EUR1 billion collateralized debt obligation of high-grade European ABS for Austria-based manager Omicron Investment Management with a ratings-based trigger. This structure follows up on a U.S. version launched late last year and managed by Brightwater Capital Management (DW, 10/18). To trigger the structures to unwind, a predetermined number of securities needs to be downgraded to CC by Standard & Poor's from their current AAA to AA ratings, according to a market official. Officials at WestLB did not return calls.
"This is essentially taking a view on the implied write-downs that may occur with any one ABS," said a rating agency official. Rating agency officials say they are looking at high-grade ABS deals that propose triggers based on pre-set levels on both losses and spread widening. "For instance, the deals will allow for 1% losses and widening up to 200 basis points within the first year," said one. This approach essentially tracks the net-asset value of a portfolio, which for ABS is often a more important measure of performance than tracking credit downgrades, he added.
