Bank of America Securities has begun to market an E1 billion collateralized debt obligation, called Anchor CDO I, that is unique in that it will be the first CDO to feature a junior super senior tranche. Mitch Braselton, head of global structured products marketing for Europe, The Middle East and Africa at BofA in London, says one motivation behind structuring a deal like Anchor is that monolines and reinsurers--super senior swap providers--have changed their criteria and are more demanding about the amount of subordination in a deal.
The junior super senior tranche is a triple-A rated piece carved out of the bottom of the super senior tranche. It is a funded note designed to appeal to investors concerned about ratings downgrades, particularly structured investment vehicles and commercial paper conduits, explains Mitchell Lench, managing director in structured products at BofA in London.
This deal will feature three times the level of subordination required by ratings agencies. The super senior tranche has the highest level of subordination in the structure. The junior super senior tranche, in effect, carves out the part of the risk normally in a super senior tranche and offers it to investors, leaving the rest--the super senior tranche--to be swapped out by the super senior swap provider.
The junior super senior tranche will pay investors about 50 basis points over Euribor and has the characteristics of a note, says Lench. The super senior tranche will be unfunded. All the tranches below the super senior are funded, or are backed by the cashflow of the underlying structured products. The CDO has a six-year average weighted life.
The deal's underlying collateral will be triple-A rated structured products--asset-backeds, CDOs, mortgage-backeds, for example--selected by Harbourmaster. The deal has a six-month ramp-up period, after which it will become a static deal. By static, it is meant that the underlying collateral pool will remain fixed after a certain period.
In addition to the triple-A super senior and junior super senior tranches, there will be a triple-A/triple-A tranche, a small triple-A/double-A tranche, and a triple-B first loss tranche. The deal also has cash trapping features to guard against losses and a reserve account, into which the excess cash to pay the manager goes. If there are losses in the portfolio, they will be deducted from the fees.