Pricing on a roughly $800 million Rabobank collateralized debt obligation is expected this week. The hybrid CDO, called Bayberry Funding, will combine synthetic and cash assets. According to a Fitch Ratings presale report, the co-issuers will enter into an unfunded super senior swap with a notional amount of $422.5 million and issue $227.5 million of funded notes and invest in a $650 million portfolio of synthetic and cash securities and a credit default swap collateral account. It is made up of 83% subprime RMBS, 6.2% CLOs, 4% CMBS, 3.8% structured finance CDOs and 3% prime RMBS. At closing, the target portfolio will consist of 91.1% CDS and 8.9% cash assets. The portfolio team is headed by Warren Tong.
"A CDS linked to mortgages is a developing area in the market," said Sheldon Sussman, global head of structuring and portfolio management, global financial markets. "It allows us to not only buy new issues, cash assets tend to be new issue, and CDS, but it also gives us the flexibility to select vintage transactions, which might not be available in a cash market."
The group did a fair amount of ramping up before the end of the year so it was able to take advantage of the spread widening that occurred in the Triple-B rated mortgage product. "A lot of those spreads have come in since the beginning of the year," Sussman said. "The transaction will benefit from that." He said reception has been very strong because investors recognize the value of credit default swaps.
Morgan Stanley is the lead arranger and it is the first time the group has worked with the bank. "They have a lot of expertise with the product, which was important in deciding to work with them on the transaction," Sussman said.