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Derivatives

Bear Stearns To Market Synthetic CDO With Near-Junk Credits

Bear Stearns is preparing to market a synthetic collateralized debt obligation referenced to a USD500 million pool of bonds that will be both high-rated investment-grade credits and credits that are just above junk bond status. The deal is expected to come to market near the end of the second quarter, according to market officials. Such deals, including near-junk rated reference assets, are unusual because there is a dearth of liquid credit-default swaps referenced to low grade names. However, these structures likely will become more common because of a general deterioration in credit quality and in anticipation of proposed capital adequacy rules. Officials at Bear Stearns declined to comment.

The CDO, which is being reviewed by the rating agencies, has yet to be named. Market officials said the CDO will be actively managed by a large Philadelphia-based money manager. It will be the first synthetic CDO managed by the Philadelphia firm, market officials added, declining to name the firm. The manager will be responsible for stemming potential losses on the CDO by purchasing default protection on the reference credits. The reference portfolio will likely consist of 100 credits, several of which are to be just above high-yield status with a rating of BBB minus or BB plus.

"Most of these deals are pretty strict on the amount of investment-grade credits that are required in the portfolio," said a market official who is familiar with the product. "This will be the firm's first move down a little bit on the rating scale," he continued. Investors will be able to buy into the deal through three or four tranches of credit-linked notes. The specific rating on the tranches has yet to be determined. Market officials said the deal would have one super senior rated tranche, which will be sold as a credit-default swap, and a AAA tranche.

 

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