The price of placing super senior risk has shot up over the last month as insurers have reassessed restructuring risk after U.S. broker dealers designated Xerox' restructuring in late June as a credit event. In addition, Financial Security Assurance--one of the largest players--recently decided to temporarily pull out of the CDO market, according to Betsy Castenir, spokeswoman in New York.
David Littlewood, global co-head of the structured credit products group at The Royal Bank of Scotland Financial Markets in London, said the price of placing super senior risk has increased to 10-15 basis points from 8-10bps, even with extra subordination, over the last month. "At this level it makes deals much harder to do, so some firms may look at dispensing with the super senior tranche entirely. This would mean [investors in the] AAA note...would have control of the deal." This is a feature RBS is currently examining.
Indeed, this already appears to be happening. "We are getting significantly more money, more subordination and a larger role in selecting the names," said Michael Schozer, managing director in structured finance and credit derivatives at Ambac Assurance Corp. in New York. A knock-on effect has been an increase in the amount of mezzanine notes firms are having to sell to get the extra subordination. This makes the deals harder to place.
Schozer estimated that the eight insurers who sent a position paper to the International Swaps and Derivatives Association about restructuring earlier this year (DW, 9/8) have sold approximately USD300 million of protection, most of which is in CDOs. This represents around 2% of the new premium AMBAC has written.
Rating agencies have also seen an increase in the cost of placing super senior tranches accompanied by greater credit support for the lower rated tranches, noted Nik Khakee, director in structured finance at Standard & Poor's in New York. Demand for credit enhancement is sparked by CDO structures wanting to prevent ratings downgrades. Whereas structurers would previously put the exact amount of credit support into a deal to achieve the desired rating, they are now giving excess support.
