MBIA Insurance recently liquidated a seasoned collateralized debt obligation on which it had wrapped the senior classes, apparently to the detriment of mezzanine and subordinate note holders, according to a CDO buyer and analysts. They declined to identify the Rule 144a offering but said MBIA's actions are noteworthy because it is rare for monolines to collapse a deal for performance reasons and it has occurred only a handful of times in the history of the CDO market. The specific transaction could not be identified. MBIA officials referred calls to Liz James, spokeswoman, who was unable to comment without further information.
That the liquidation is a rarity is largely a function of the fact that nearly all of the CDOs sold in recent years have been completed with senior-subordinate structures; monoline involvement in the CDO market tends to occur after a deal has been sold and an investor seeks a guarantor. One monoline official said less than 10 CDOs have been unwound due to poor performance.
A CDO investor said the move is a concern because subordinate and mezzanine holders in this case likely suffered and as a result he is limiting his future investments to unwrapped transactions. Although indentures vary by deal, senior noteholders, or guarantors, usually constitute a controlling third party and have the ability to shut off a deal and liquidate the underlying portfolio. "When they do that, the deal is over, the loss is locked in and there is no chance for the mezzanine," clamored the investor. He added: "You can't blame them, they are not in this business for other people."
A sell-side analyst said this conflict between the classes is an inherent dilemma in the structured credit world. "The senior guy has a lot of downside and the sub guy has a lot of upside," he said, adding, "Getting a quorum is one of the tough things about the CDO market."