Leveraged super-senior CDO tranches, popular since the spring, are losing favor, replaced in recent weeks by growing interest in equity tranches across all maturities. Atish Kakodkar, director and head of global credit derivatives strategy at Merrill Lynch, said recent protection selling pressure on super-senior tranches has squeezed value into junior tranches.
"Super senior's pretty much gone away," agreed an official at a rival firm. "It had its day over the summer, but now because the spreads are so tight, it's hard to structure new deals." Pressure from investors fleeing tightening mezzanine tranches after last spring's correlation disruption and crowding into less risky, but higher-valued, leveraged super-senior tranches caused those spreads to tighten, forcing relative value down to the most risky and traditionally less popular equity tranches.
Jeff Meli, director and head of U.S. structured credit and quantitative strategy, at Barclays in New York, said equity tranches have low correlations and look cheap right now. But investors are nervous about buying equity because those prices looked cheap last spring and kept falling. "There is still value in other areas," said one official, but "the highest relative value has shifted into equity." That is where he sees both sophisticated investors and investors less comfortable with equity risk. For those clients, dealers are offering principal-protected equity tranches and callable notes.
