Credit structurers across the street are scrambling to ramp up equity tranches of collateralized debt obligations which carry an investment-grade rating. Lehman Brothers and Prudential M&G debuted a rated equity deal last month and it is tipped to be the next big thing in structured credit. "Everyone I speak to is working on rated equity," said one head of CDO distribution at a European firm, who added this is the latest in a series of innovative structures which wrap the first-loss CDO piece (DW, 6/9).
These equity tranches are able to achieve a high rating such as A, because they pay a lower, but guaranteed, coupon. The yield in the Lehman/M&G deal was 70 basis points, which one onlooker said is around 30 bps lower than a typical equity slice. Any returns above the coupon are invested in a reserve account which is then used to absorb any credit events in the underlying portfolio. "We expect to see many trade ideas on this front in the second half of this year," said one City CDO manager. Another structurer said his firm is working on bells and whistles which will improve the investor payout, but declined to specify details or give a launch date.
