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Derivatives

Index Fattens ABS CDO Spread

Collateralized debt obligation structurers and managers are increasingly referencing the synthetic asset-backed securities index ABX in ABS CDOs to boost spreads.

Collateralized debt obligation structurers and managers are increasingly referencing the synthetic asset-backed securities index ABX in ABS CDOs to boost spreads.

The strategy is appealing because the ABX trades about 50 to 60 basis points wide to its underlying credits, even though single-name ABS CDS spreads have widened recently. On Wednesday, implied spreads--based on the dollar price--of on- and off-the-run BBB minus ABX.HE.06-1 and 06-2 were 242 basis points and 269 bps, respectively. Average single-name BBB minus spreads were about 210 bps. Implied spreads on the BBB indices were 130 bps and 159 bps, respectively, while average single-name BBB spreads were about 110 bps.

A CDO manager in New York said the index has traded wide to the names for months, but was not used in deals earlier because it was unclear how ratings agencies would rate it.

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