Leveraged super senior collateralized debt obligations are showing strong performance and drawing interest from investors. "Super senior tranches this year have outperformed because of the surge in leveraged super senior activity," said Lorenzo Isla, head of CDO and structured credit strategy at Barclays Capital, at last week's Credit Risk Summit Europe conference in London.
Although mezzanine tranches showed the best performance last year, leveraged super senior tranches are showing better performance this year. This is due in part to a relatively imbalanced market last year, with few investors willing to buy equity and or super senior tranches.
More dealers are putting together leveraged super senior deals. Additionally, the market has seen bespoke mezzanine trades by banks and insurance companies and leveraged super senior deals from traditional mezzanine investors and bank conduits. "As a result, dealers are left with less correlation exposure," Isla said. "Essentially, they are taking more of a risk."
There are a number of factors fuelling the market, including Basel II, which has driven demand for highly rated ABS and CDOs. Additionally, as insurance and pension regulators increase the need to align assets and liabilities, a greater emphasis is being placed on achieving high returns from fixed-income investments. Finally, FASB 155 and ASBJ No. 12 are allowing U.S. insurers and Japanese investors to allocate more assets to senior synthetic CDOs as it removes the need to mark to market these investments.