State Street Global Advisors last week closed its second hybrid asset-backed securities collateralized debt obligation. The USD600 million long-short deal, called Diogenes CDO II, consists of long positions in cash or synthetic primarily sub-prime residential mortgage-backed securities and short positions referencing primarily housing-sector related single-name corporate entities.
Frank Gianatasio, head of structured products in Boston and portfolio manager on the deal, said it was well received so the firm decided to upsize from USD400 million during marketing. The appeal of the strategy, he said, is it hedges concerns about the U.S. housing market and also captures pricing discrepancies between two asset classes. "The theory is that in times of stress, unsecured corporate credits [including home builders, mortgage insurers and securities houses] will widen more than the underlying long portfolios of securitized ABS," he said. "We are already seeing that. Corporate shorts have moved out recently while sub-prime mortgage ABS has remained relatively stable."
Officials at Deutsche Bank, which underwrote both Diogenes I and II, said the strategy is a mainstay of the firms and is used in a number of deals for a variety of asset classes. The underlying portfolio of a TCW deal called Dutchill I that closed last year was long mezzanine RMBS and short corporate indices. A new Halcyon deal is reported to be long corporate loans and short investment-grade credit. Officials at Deutsche Bank declined all comment on that deal and others in the pipeline because they have not closed.
