Spreads on collateralized debt obligations in the secondary market were a hot topic at the European Securitisation Forum's conference in Geneva last week, as panelists discussed whether secondary paper still offers any value to new issue deals. Investors and traders alike said the relative spreads have tightened as more investors pile into the secondary market. Value in the secondary market is eroding in European CDOs just as quickly as it did in U.S. securitizations. "Fifteen months ago, nobody was looking at the secondary market; now everybody from hedge funds to bank treasuries is looking," said Sunil Dattani, senior v.p. and head of structured finance investments at Gulf International Bank. Dattani, who buys more than 60% of his portfolio in secondary product, said any new investors may be out of luck. "They are coming to the party too late, drunks are already reeling out the door and passing out," he quipped. Ross Heller, head of global CDO trading at J.P. Morgan Securities, points out that while a discount still exists, the secondary market is trading very tight to the primary market for the same quality product.
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| Sanjeev Handa |
Sanjeev Handa, managing director at TIAA-CREF, says better transparency from third-party providers is contributing to narrow spreads. "It's nice not to have to rely on your dealer for your stress runs," said Handa. "With third-party analytics, you don't have to tip anyone off you're going to buy or sell a deal," he added. Frederic Simkin, CDO product marketer at UBS, noted that despite the relative tightening, there is still a 10-15 basis point differential between senior, high-quality primary and secondary paper. He added that this gap widens further down the capital structure. "There is still a stigma attached to the secondary market and we see a 12-month old deal of the same quality as a new issue trading cheaper than the new issue," he said.
