Structured finance analysts are highlighting the increasing number of collateralized debt obligations that include a first loss AAA tranche that is subordinated to the senior most AAA tranche. The most recent example is Merrill Lynch Investment Management's Longhorn CDO III, a $300 million collateralized loan obligation that priced earlier this month. The two senior-most AAA tranches priced at LIBOR plus 55 and LIBOR plus 111 basis points, respectively. Joe Matteo, a portfolio manager with Merrill, could not be reached by press time.
One analyst said the development is a pricing issue caused by current conditions. He noted the move eases the problem of placing the senior-most AAA paper. Downgrade activity on senior tranches has led to investors and swap counterparties requiring more subordination, he added. He explained that as long as the tests required by the agency are met, a tranche can still be rated AAA, even being subordinated to another AAA. HarborView Asset Management's Harbourview CLO V also contained subordinate Triple-A tranches (LMW, 2/24). Recent non-CLO deals such as the trust preferred Trapeza II from Trapeza Capital Management and G-Star--an ABS CDO by GMAC Institutional Advisors have the feature also, according to the analyst.