Citigroup is marketing an asset-backed securities collateralized debt obligation that references and automatically reinvests in the ABX index at each roll. The USD2 billion deal, called Lacerta I, will not be actively managed but will roll into the current on-the-run ABX BBB and BBB minus indices for the life of the deal. This avoids the cost of a manager and offers the higher spread of the index. The strategy is similar to that used in constant proportion debt obligations, which reference and roll with the CDX and iTraxx credit derivatives indices (DW, 10/9).
Lacerta uses a so-called turbo structure, whereby interest above a 12% running return on the equity tranche is used to pay back 6% of principal a year to BBB investors. Chris Carman, head of ABX correlation trading at Citi in London, said this is to attract BBB investors. Lacerta consists of BBB through AAA rated tranches, a 70% unrated super senior tranche and 5.5% subordinated equity tranche. It has a five-year reinvestment period and a weighted average life of 3.8 years.
Carman declined comment on the deal's investors, but market players said its name--after a constellation--suggests it is one of several large deals structured for Magnetar, an Evanston, Ill.-based hedge fund, that has invested in a slew of CDOs with astronomy-themed names (DW, 8/11). Dave Snyderman, head of fixed income at Magnetar, did not return calls by press time.
