Deutsche Bank is in the market with the largest-ever collateralized debt obligation of structured finance assets. Several market pros say the deal, a $2.5 billion vehicle dubbed Synthesis, is a synthetic transaction referenced to an underlying pool of asset-backed securities held by the bank. Michael Lamont, the banker at Deutsche Bank on the deal, did not return calls. CDOs of corporate bonds have exceeded the size of this deal, but this is the first ABS CDO over $2 billion, according to officials at rival firms who noted that it is trickier to structure a synthetic structured finance deal.
The deal also underscores a growing shift toward more CDOs, and larger ones, of structured finance. Jerry Gluck, managing director at Moody's Investors Service, notes that structured finance CDOs constitute roughly half of the deals done so far this year. "Spreads have progressively tightened to where there's not much arbitrage on the corporate side," he says. Gluck declines to comment on specific deals.
Most structured finance CDOs tend to be cash-funded and in the $300 million range because of a limited amount of higher-yielding ABS collateral. The Deutsche Bank deal, however, dwarfs that size because, as a synthetic, the bank can issue a notional value much larger than the actual underlying assets. "It's not your classic arbitrage cash flow deal where they have to go out and source $2.5 billion of ABS collateral; the larger structured product deals are the main event right now," says one head of dealer CDO research.
But others say the Deutsche Bank deal is also noteworthy because it likely includes some of the CDO paper Abbey National has been unloading via PIMCO. Earlier this year Abbey National enlisted PIMCO to help sell its $16 billion CDO portfolio, and in recent months PIMCO put out an $800 million bid list that was widely assumed to have been taken down by Deutsche Bank and Bear Stearns. These sales were credited with fueling a secondary CDO market. Outsiders say part of this portfolio is now being repackaged in the massive new deal. "Deutsche Bank was one of the most-active firms in bidding for the Abbey portfolio, and the thinking was that it would show up in some sort of securitization down the road," says one collateral manager of ABS CDOs.