Deerfield Capital Management is prepping a structured finance collateralized debt obligation that has money market tranches with a put option embedded in it, says a CDO official. Pricing for the $300 million deal, called NorthLake CDO, is scheduled for the end of the month. Morgan Stanley is underwriting the notes. The collateral is a mix of asset-backed securities, mortgage-backed securities and CDOs. Calls to Jon Strain, head of distribution at Morgan Stanley, were not returned. Scott Roberts, president at Deerfield, declined to comment.
The put feature within the money market tranches has been used by only a few underwriters last year, such as Bear Stearns and Goldman Sachs, says the official. The feature is growing in popularity because it allows managers to tap into investors who traditionally do not buy notes exceeding one-year maturity, allowing structurers to broaden their investment-base, "which is what CDOs are all about," says this official. The way this feature works, explains Allison Senk, analyst at Fitch Ratings, is that there will be a put in place until the short-term notes are paid in full. If the underwriter fails to sell the money market notes, an undisclosed put counterparty will then buy them.
In this deal, more than half of the notes sold to investors consist of money market tranches to be re-marketed annually by Morgan Stanley. No price talk is available for the debt tranches but the money market tranches are being talked at LIBOR plus five or six basis points, considered cheap as money market tranches usually trade through LIBOR.