A variation on the leveraged super-senior structure which multiplies exposure--and therefore potential returns--to risk further down the capital structure has been gaining momentum with collateralized debt obligation investors over the past month. Extremely tight spreads in the super-senior piece has led investors to look at buying into leveraged senior tranches, i.e. the 12-22% slice of the European iTraxx index and the 15-30% tranche of the North American CDX.
"These are arguably the highly-rated CDOs that offer the most value in the current market environment," said Lorenzo Isla, head of European structured credit strategy at Barclays Capital in London. Tranches are being leveraged by factors of between five and eight, said a London-based structurer, and a 10-year tenor is returning around 60 basis points over three-month LIBOR.
Credit officials, however, questioned how long value will last in the senior tranches. The high level of activity in the seven- and 10-year senior tranches means attractive spreads are slowly being eaten up and more value is appearing in more junior tranches at this tenor, namely mezzanine. One European structurer said his firm is contemplating leveraged mezzanine notes, but is yet to issue a transaction.
