Leveraged super senior plays are being souped-up by bringing short tranches into the mix. Out front, Bank of America has closed a series of structures featuring the usual leveraged exposure to the super senior tranche of CDOs, but the firm has added a short AAA tranche which is also leveraged. Other firms in Europe are eyeing the long/short strategy, with structuring officials at Citigroup and Deutsche Bank confirming they are looking to arrange the trades. Fitch Ratings has also been asked to provide assessment of a similar deal, said Lars Jebjerg, director in structured finance in London.
Alex Bernand, global head of structured credit trading at BofA in London, said the twist aims to protect super senior investors against spread volatility brought into the trades by triggers based on the market value of the underlying assets. "We integrated the short leg to neutralize the effect of the mark-to-market risk if spreads widen," Bernand said, highlighting this is important now because spreads are tight.
BofA's deals feature both spread and loss-based triggers. The super senior and AAA tranches reference portfolios of about 100 names, are leveraged five to 20 times and have notionals of USD30-70 million. The deals were purchased by insurance companies and money managers globally, Bernand noted, declining to name specific investors. European houses were more interested than their U.S. counterparts to add long/short and trigger features. "The market is more reactive in Europe when something new comes along," he said.
Bernand is also considering adding a manager; following the initiative of other firms who began structuring single tranche managed leveraged super senior trades last month (DW, 8/22). Credit officials said the market craze for leveraged trades, which are financed with cash from a firm's balance sheet, will only increase as protection buyers continue to lap up boosted returns high up the capital structure.
