Rich CDO equity tranche returns have piqued institutional buysider interest and so dealers are scurrying to structure deals with exposure to these unrated tranches. Popular deals include new takes on old favorites, such as principal-protected and combination notes. These deals link principal investments to either higher-rated tranches or zero-coupon bonds carrying the arranging dealer's credit rating, while offering coupons linked to a CDO equity tranche.
"Dealer focus has been on creating new structures that allow investors to take advantage of the relative cheapness in equity," said Oliver Dunsche, director and head of credit derivatives structuring at Barclays Capital in New York. "We're definitely seeing a pickup in activity and interest in combo notes," agreed another Street structuring official.
CDO equity tranches across maturities have gained popularity recently as tightening spreads in mezzanine and super-senior tranches have squeezed value down the capital structure (DW, 10/7). Because they are unrated, institutional funds with ratings-based investment criteria have been unable to access these tranches.
