Investors, such as structured credit hedge funds, are starting to snap up mezzanine tranches of synthetic CDOs, which had recently been unfashionable, because of the tightening spreads. Eric Oberg, head of credit derivatives sales and marketing at Goldman Sachs in New York, said the firm is seeing increased interest from investors, including hedge funds that are new entrants to structured credit, in buying mezzanine tranches in both the primary and secondary markets.
The segmented interest in mezzanine tranches can be explained by a lack of a universally accepted methodology in CDO valuation models, according to Sivan Mahadevan, head of credit derivatives and structured credit research at Morgan Stanley in New York. Many CDO methodologies ignore underlying market pricing and thus have not as yet factored in recent spread rallies in the investment grade and high-yield markets, he noted. Once market values are factored in, previously out-of-the-money tranches, such as many mezzanine pieces, will be back in-the-money and this instantly makes them more attractive, he said. Players quick to get synchronized with the underlying markets will benefit from the structures before the rest of the market catches up, he noted.
