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CDO Sales Pop On Collateral Shift

Collateralized debt obligation sales jumped to more than $73 billion in the U.S. this year, about 17% higher than last year according to Credit Suisse First Boston data.

Collateralized debt obligation sales jumped to more than $73 billion in the U.S. this year, about 17% higher than last year according to Credit Suisse First Boston data. Demand for loan- and structured finance-backed deals kept bankers and collateral managers busy and led to ever-tighter liability spreads, with senior CLO classes nearing the 30-basis point over LIBOR level late in the year.

Overall, the two sectors constituted the lion's share of deals, with asset-backed deals accounting for about half the overall total. The year also saw the continuing emergence of trust preferred-backed deals, from both banks and insurance companies, as well as some hybrid deals featuring exposure to both sectors. CDO market professionals say the year is noteworthy mostly for the expansion of the investor class and an increasing commoditization of loan and ABS deals, which are seen as more secure than the first generation of CDOs, which were backed by straight corporate credit.

"Frankly, we have not seen any groundbreaking innovations. There have been some minor ones, with money market tranches, but nothing like we've seen in recent years," said one researcher. "An important trend is investors are becoming more assertive and that's why single-tranche CDOs have become so popular," he added.

Jim Finkel, co-founder and ceo of Dynamic Credit Partners, which closed its first deal earlier this year, said significant trends include the market's move toward CLOs and ABS CDOs and tightening in the underlying assets. "The tightening always seems to happen more on the asset side than the liability side, so you tend to have to adjust structures," he noted, adding deals are more levered as a result.

That being said, the supply surge in mortgage-related ABS meant there was no shortage of attractive collateral to make the deals work, regardless of the improving credit picture and tighter spreads. "The arb has looked pretty darn good," said Chris Ricciardi, head of the structured credit products group at Merrill Lynch, which has sold $10.7 billion in ABS CDOs this year.

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