UBS has structured a novel collateralized debt obligation that gains exposure to the consumer mortgage sector but avoids the sub-prime market many CDO participants are avoiding. The $500 million Nautilus RMBS CDO I is backed by higher quality borrowers than typical mortgage-concentrated vehicles—but the majority of the actual bonds comprising the collateral are sub-investment grade, according to a UBS official. He noted there are increasing concerns about origination standards in the sub-prime space as lenders try to keep volumes up despite higher base rates. "We would argue this structure is an answer to that; if you have a portfolio with a lot of sub-prime, this adds some diversity," he said.
Jim Stehli, head of the CDO group at UBS, declined to comment.
The transaction, which was priced late last month and is set to close in the coming weeks, is backed junk-rated bonds from prime borrowers. A total of 65% of the collateral is below investment grade, in a mix of double-B and single-B assets. The $97 million equity class has been retained by the deal's collateral manager, Ramius Capital Group. This also marks Ramius' first CDO, although it has experience in the mortgage markets. The senior class was priced at three-month LIBOR plus 30 basis points, which is in line with other mortgage-backed vehicles.