tag:blogger.com,1999:blog-30643134.post14292030109800184..comments2023-12-26T01:10:26.319-05:00Comments on Accrued Interest: More on the CDO PutAccrued Interesthttp://www.blogger.com/profile/05096191765979971184noreply@blogger.comBlogger4125tag:blogger.com,1999:blog-30643134.post-20885190666365246692007-06-27T19:34:00.000-05:002007-06-27T19:34:00.000-05:00Most of the subprime collateral is in Mezzanine CD...Most of the subprime collateral is in Mezzanine CDOs of ABS, which largely invest in the risky BBB tranches of MBS. <BR/><BR/>Unfortunately, the Mezzanine CDOs of ABS new issue market boomed in 2005 from $60 billion in volume to $200 billion in 2006. Keep in mind that global high-yield issuance in 2006 was only $152 billion in comparison.<BR/><BR/>Exposure to subprime RMBS among these Mezzanine CDOs? In 2006, it was over 70%! <BR/><BR/>(See S&P's March 2007 report titled The Subprime Market: Housing and Debt)<BR/><BR/>These BBB and BB tranches of subprime bonds that are serving as collateral for Mezzanine CDOs only have 8%-10% credit support. The subprime mortgage pools are going to experience losses that will seriously test those credit support levels. Plenty of BBB tranches of subprime bonds will default. <BR/><BR/>With defaulting collateral, any tranche of the CDO with that underlying collateral could be wiped out. Even a AAA tranche requires cash-flow producing collateral. They can withstand 20% losses but not an utter cash flow drought. <BR/><BR/>And yet such a drought is possible depending on how the BBB tranche of subprime bonds perform. <BR/><BR/>Finally, remember that most of the ARM resets have yet to occur. The worst is yet to come. The prospects for these BBB tranches of subprime bonds is precarious at best but all the investors in 2006 Mezzanine CDOs ($200 volume outstanding) have bet on those tranches.<BR/><BR/>Stay tuned!Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-30643134.post-31347671197685051152007-06-26T16:22:00.000-05:002007-06-26T16:22:00.000-05:00I think it is a vintage issue. Exactly as you say,...I think it is a vintage issue. Exactly as you say, 1999-2000 vintage high-yield CBOs turned out to be complete shit. By 2001 spreads had blown through CDO Put territory.<BR/><BR/>Not only is it the lower-rated stuff that's getting hit, but generally you have to be a QIB, which means you have to be worth $100 mil or be an investment pool of that size. If you've got that kind of money to throw around and you don't know what you're doing, I don't feel too sorry for you.Accrued Interesthttps://www.blogger.com/profile/05096191765979971184noreply@blogger.comtag:blogger.com,1999:blog-30643134.post-41307099221938308832007-06-26T12:44:00.000-05:002007-06-26T12:44:00.000-05:00In my opinion, the other important point that does...In my opinion, the other important point that doesn't get mentioned much in the numerous media reports on CDO's is that the investors in this product are sophisticated institutional investors. This product isn't sold to mom & pop on main street. If the sophisticated institutional investor isn't doing due diligence and research on the product and CDO manager he is buying, then he is an idiot.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-30643134.post-84680051069909610832007-06-26T08:16:00.000-05:002007-06-26T08:16:00.000-05:00Is this a vintage issue? 2006 subprime mortgage pa...Is this a vintage issue? 2006 subprime mortgage paper is the worst performing in history due to the lax underwriting standards used and the concurrent housing slowdown. <BR/><BR/>Perhaps new CDOs can avoid 2006/2007 MBSs and use older MBSs that are performing better as collateral. Or the new CDOs can choose a different asset class. <BR/><BR/>CDOs used to buy high-yield corporate bonds but around 2002, in light of high defaults, dumped them as collateral in favor of higher-performing leveraged commercial loans. <BR/><BR/>The other point is that the equity tranches and BBB tranches of CDOs are designed to take significant losses when defaults are unusually high. Why is the media in a lather when this actually happens? The issue is the AA and AAA tranches , which represent 80%+ of CDO deals. If those tranches take losses, then the CDO was not properly designed and the media's panic act will be justified. However, the media doesn't seem to distinguish between the different tranches when talking about downgrades and losses. Not to mention that they focus on market value declines when CDO losses (as opposed to margin call shortfalls) are entirely cash-flow based.Anonymousnoreply@blogger.com