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Tight Spreads See Manager Drop Hybrid CDS Exposure

Los Angeles-based TCW Asset Management is decreasing the proportion of credit-default swaps in the latest installment of its hybrid collateralized debt obligation series because of tightening spreads. The USD500 million deal, dubbed STACK 2006-1 and structured by Morgan Stanley, references A- through BB-rated residential and commercial mortgage-backed securities and asset-backed CDOs.

The predecessor deal STACK 2005-2 was arranged by Barclays Capital and has a similar composition, allowing for 65% to 80% synthetic collateral. The latest CDO will be weighted closer to 65% at the outset, while 2005-2 is closer to 80%, said Lou Lucido, senior portfolio manager at TCW. "In October/November, when 2005-2 closed, synthetics were trading way cheap to cash," Lucido explained. "Spreads snapped back dramatically based on continued demand in the cash market...Opportunistically, [BB cash] spreads are attractive." Lucido declined further comment on spreads or portfolio distribution ahead of the deal's close July 27.

2005-1, the first of the three STACK deals, was arranged by Deutsche Bank and consisted of 100% synthetic collateral and no BB notes. Lucido said TCW decided to use different underwriters on each deal to reach different investors. A structuring official at Morgan Stanley did not return a phone call by press time.

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