UBS and ACA Capital are targeting equity-tranche investors for a global sub-prime residential mortgage-backed securities CDO. The USD2 billion deal, called ACA Aquarius 2006-1, has been tweaked to make it less risky for equity investors.
Aquarius, unlike most comparable managed synthetic deals, does not use over-collateralization tests or feature payment-in-kind notes, said an official close to the deal. This appeals to equity buyers, because when OC tests trip, interest stops flowing down the waterfall and equity investors take the hit. "An equity buyer will be much happier without the prospect of getting shut off," said one analyst. Payment-in-kind notes, which allow for interest payments to be added to the principal of the CDO if they cannot be paid from available funds, also take a toll on equity investors.
Analysts said the UBS structure is not common, but not unheard of either. Aquarius allows for a minimum of 90% credit-default swaps on predominantly BBB and BBB minus RMBS, and is expected to be 100% synthetic when it closes early September. So far, the equity has been placed and other pieces are still being marketed. An official close to the deal said the indicative yield for the equity tranche will be in the high teens.
Jim Stehli, managing director and head of the global CDO group at UBS in New York, and Laura Schwartz, senior managing director the USD12 billion collateralized debt obligation manager in New York, declined comment ahead of the deal's close.
