Cairn Capital has closed its second collateralized debt obligation backed by high-grade asset-backed securities. The USD1 billion Cairn High Grade ABS CDO II, which priced in August (DW, 9/4), is unusual among high-grade deals for having the flexibility to be 100% synthetic or cash, said Andrew Jarmolkiewicz, an official in the London asset manager's ABS team.
The collateral is mostly composed of home equity ABS with a 25% bucket for other CDOs and a 5% bucket for other types of ABS such as student loans. The cash assets will be funded through a total-return swap with underwriter RBS Greenwich Capital. The vehicle will be able to trade between the total-return swap for cash assets and CDS for synthetic ones: a feature more common in mezzanine ABS CDOs because the CDS market for mezzanine securities developed liquidity earlier than the market for high-grade assets, Jarmolkiewicz said.
The transaction also attempts to remove interest rate risk through interest rate matching and by avoiding certain collateral. "It's particularly important to try and remove interest rate risk from high-grade deals, which have higher leverage because of the higher-rated portfolios," Jarmolkiewicz explained. To do that, the deal matches the frequency of the assets and liabilities payments and their LIBOR fixing dates. In addition, it maintains only a 2% fixed-rate bucket, which is not expected to be used, and avoids cap corridor bonds. These bonds are floating-rate mortgage-backed securities where the underlying mortgages are fixed and which contain interest rate hedges. "We spent about a year ramping the transaction but the benefit is that we've been able to ramp a portfolio we think is very clean and that we are comfortable with," he said.
The A-1 class was priced at 38 basis points over three-month LIBOR. The deal closed Sept. 14.
