Atlantic Asset Management, which has $7 billion under management, is in the market with a roughly $330 million collateralized debt obligation backed by high-yield bonds, according to sell-side sources. Links Securities in New York is acting as underwriter. The initiative is raising some eyebrows among CDO professionals who question the plausibility of issuing high-yield CDO liabilities now, after the high-yield market's rally has compressed spreads on the underlying bonds and reduced the arbitrage. "There is zero arb. Distressed high-yield bonds are 600 basis points over Treasuries and the [high-yield] index is Treasuries plus 400. I don't know how they get a high-yield deal done at these levels," says one CDO researcher, who notes the typical high-yield bond was 1,100 basis points over T-bills a year ago. To be sure, these compressed junk bond spreads have kept a lid on CDO issuance, with just a handful of CDOs backed by high-yield this year.
The transaction, dubbed Prado CDO, will mark Atlantic Asset's sixth CDO since 1998. Elaine Hunt, a partner at the buy-side shop at Stamford, Conn., declined to comment and Tom Priore, head of the CDO origination business at Links in New York, did not return a call.