CDO Market Remains Almost Frozen, JPMorgan, Merrill Traders Say
By Jody Shenn
Feb. 5 (Bloomberg) -- Buying and selling of collateralized debt obligations based on mortgage bonds, high-yield loans or preferred shares has ground to a near-halt, traders said at the securitization industry's largest conference.
``We're definitely in a period of very low liquidity at the moment, which has actually been dropping precipitously in the last few weeks,'' Ross Heller, an executive director at JPMorgan Securities Inc., said yesterday during a panel discussion at the American Securitization Forum's annual conference in Las Vegas. ``It's a challenging time.''
The slowdown of the more than $2 trillion CDO market follows record downgrades in mortgage-linked securities last year. Some AAA rated debt lost all its value. CDOs, which have fueled unprecedented bank writedowns since mid-2007, repackage assets into new securities with varying risks.
Lighter trading volumes for asset-backed bonds and larger- than-typical differences between the prices at which they can be bought and sold have made valuing holdings difficult and dissuaded investors from purchasing the debt, said Sanjeev Handa, head of global public markets at TIAA-CREF.
More than 60 ``opportunity'' funds have been created to take advantage of a plunge in prices for mortgage assets, said Carlos Mendez, a senior managing director at Institutional Credit Partners LLC.
Along with insurers, they're among the limited number of buyers of existing mortgage-linked CDOs, Mendez and Heller said.
Super-Seniors
Merrill Lynch & Co., the New York-based securities firm with a record loss last year amid writedowns on the most-senior AAA pieces of mortgage CDOs it underwrote, ``has been actively talking to people'' about purchasing its super-seniors, said Brian Carosielli, a managing director.
Investors with experience with residential-mortgage assets have been buyers, paying in the ``mid-teens to low 30'' cents on the dollar for the senior-most, or super-senior, classes of CDOs comprised of low-rated asset-backed bonds, he said.
Carosielli and Mendez said they thought that trading of mortgage-linked CDOs has picked up a bit this year. So-called collateralized loan obligations, or CLOs, are ``definitely more illiquid'' in recent weeks than in the past, Carosielli said.
Some ``macro'' hedge funds without experience in the market have been CDO buyers, Mendez said.
``Everyone wants to be Paulson & Co.,'' he said, referring to the New York-based hedge fund that profited from the collapse of the U.S. subprime-mortgage market by branching into derivative bets against home-loan securities.
Credit-Default Swaps
Some buyers have been seeking out specific mortgage-tied CDO classes that won't ever be offering payments to investors again, said Richard Rizzo, a director at Deutsche Bank AG.
Those investors previously bet the classes would default by using derivatives called credit-default swaps. By buying the classes, they want to collect their windfalls sooner, as well as end the regular default-protection payments they owe, which may stretch on for more than a decade, he said.
Under about half of the swap contracts, Rizzo said, they can collect their windfalls sooner by delivering the class after a steep-enough downgrade to the bank that's taken their wager. The bank, which doesn't want to own the class, could then sell it to a similar investor.
``I've traded one bond that's worthless eight times this year,'' Rizzo said. ``So it's like, `How many times can I trade the same bond that's worthless for five cents?' It is kind of funny.'' |
