Two collateralized loan obligations are in the market as managers see an attractive arbitrage between spreads on assets in the secondary market and on the liabilities they issue to support the deals. Both ING Capital Advisors and PPM America are in the market seeking to take advantage of spreads widening in their favor. Lang Gibson, CDO analyst at Banc of America Securities, said CDO arbitrage is at an exceptionally high level. "The CLO arbitrage spreads are better by 17%, rising from 330 basis points to 385 basis points," said Gibson.
One fund manager explained that without a new issue market, managers are buying credits in the secondary market which is cheap. "[Secondary market buying] has been historically expensive, but now it's not a problem finding the collateral at a good price," he said. Unlike the costs associated with the assets, funding costs, or the other side of the arbitrage equation, have only increased slightly--approximately two or three more basis points on the AAA notes. One analyst noted that funding costs have not materially increased because increased demand exists for the CDO product. For example, there are hedge funds looking to invest in the BBB and BB tranches of CDOs, so they can turn around and securitize that in the form of a CBO of CBOs or a CBO of ABS. "There are new sources of liquidity chasing vehicles," he said.
Market sources said ING is marketing a $400 million cash flow arbitrage deal--Oryx CLO-- to investors. The structure comprises 100% senior secured loans. The fund is reportedly ramping up collateral, looking to take advantage of many of the discounted credits in the secondary market. UBS Warburg has been chosen to underwrite the notes that will suppport the deal as the bank came in as an equity sponsor. Michael Campbell, managing partner at ING Capital Advisors, declined to comment.
PPM America is reportedly back in the market ramping up its $470 million deal--Endeavour CDO--comprising 60% distressed loans and 40% asset-backed securities. The deal was launched prior to the Sept. 11 attacks but was shelved temporarily for the as the manager was waiting to see where market conditions would settle. The timing seems right now. The deal is reportedly scheduled to close in a few weeks. Banc of America Securities is slated as the underwriter on the liabilities. Brian Schinderle, senior managing director, co-head of the special investment group at PPM America, declined to comment.