AllianceBernstein, a USD618 billion collateralized debt obligation manager, is managing its first investment-grade corporate synthetic CDO. J.J. McKoan, director of global credit and alternative investments and chief portfolio manager on the deal, said the foray into this market is a natural extension and coincides with growing investor interest in managed synthetic CDOs.
The deal, called Prima, has not yet closed, but structurers at Barclays Capital, which issued the deal, said it has received USD170 in orders for the first round, of which close to USD150 printed last month. Prima employs a subordination cushion and uses trading gains to bring back downgraded notes to initial ratings before paying out investors or itself. Gains above stability maintenance are split 80/20 between investors and Alliance. McKoan said this strategy appeals to investors in an environment of tight spreads and high levels of idiosyncratic risk. "[Reallocation of trading gains] is an alignment of interests," he said, noting the strategy is consistent with Alliance's defensive philosophy.
Prima consists of 100 primarily investment-grade names, with a 10% allowable, but 5% initial, sub-investment grade bucket and principal-protected equity tranche. Standard & Poor's and Moody's Investors Service rated the tranches AAA through BBB.
Officials close to the deal said the second round should see greater participation, particularly from U.S. insurance companies, on the back of an update to Financial Accounting Standards Board's derivatives accounting standard 133 (DW, 3/31), and they tipped it to upsize to USD300-400 million.
