The most popular attachment points for non-equity bespoke tranches of synthetic collateralized debt obligations are shifting lower as investors search for yield from tight risk premiums.
In the first half of this year, issuance of junior mezzanine tranches, which attach to the capital structure between 1% and 5%, outstripped that of 5% to 10% mezzanine and 10% and above senior tranches, according to figures compiled at Barclays Capital. Junior mezzanine transactions accounted for 61% of issuance as opposed to only 36% in 2005, according to the firm's data.
Also contributing to the increase in lower attachment points is the revamped rating methodology introduced by Standard & Poor's in January (DW, 1/16), which allows for lower levels of subordination for investment-grade CDOs. In addition, investors active in the leveraged super senior space are looking at junior mezzanine because the returns are more attractive.
