CDO/CDS Update 1/9/07
Nomura Fixed Income Research
CDO/CDS Update 1/9/07
I. Commentary
As the first week of 2007 came to an end, the lower-rated tranches of the ABX continued their late
2006 trend of spread widening. After surging to a level above 400 bps in early December, the BBB-
tranche briefly compressed about 30 bps to 380 bps in mid-December before ending the year at 413
bps. In the first week of the New Year, amid continued negative sentiment towards the home equity
sector, BBB- spreads widened to 477 bps, a 64 bps change in one week. The BBB tranche has also
felt similar pressure, as spreads moved 33 bps wider to 292 bps since the end of December. As we
move further up the credit curve, volatility has been modest in the single-A tranche, widening about 5
bps since mid-December to 73 bps. The double-A and triple-A tranches have proven resilient to
those looking to take a short position on the HEL ABS sector with spreads essentially flat over the
past few weeks at 14.3 and 8.9 bps, respectively.
Select Tranche Spreads of ABX.HE 06-2
500
450
400
350
300
p
read (bps)
250
S
200
150
100
Jul-06
Aug-06
Sep-06
Oct-06
Nov-06
Dec-06
Jan-07
BBB
BBB-
Note: Spread data based on 35% CPR assumption.
Source: Markit, Nomura Securities
Looking at the commercial mortgage sector, CMBX spreads remain relatively stable despite the
increased volatility in the residential market. Spreads across the entire CMBX index were flat to end
Contacts:
December and since then there has only been some slight widening in the BB tranche. Since the end
Edward Santevecchi
(212) 667-1314
of the year, CMBX BB spreads are about 3 bps wider to 195 bps, while BBB tranche spreads are less
esantevecchi@us.nomura.com
than 1 bp wider to 86 bps. All of the CMBX tranches from triple-B to triple-A have traded within a
narrow range of less than 1 bp since mid-December.
Mark Adelson
(212) 667-2337
madelson@us.nomura.com
Nomura Securities International, Inc.
Two World Financial Center
Building B
This report and others are available online at Nomura's new research website. To obtain a
New York, NY 10281-1198
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Please read the important disclosures and analyst certifications
appearing on the second to last page.
Nomura Fixed Income Research
With the holiday slowdown over the past few weeks, corporate credit spreads in North America and
Europe remained stable to end the year. Since then, spreads have revealed a slight widening basis
although within a very narrow band. The CDX investment grade index was wider by 0.6 bps to 34.2
bps over the past week. For the same period, both the CDX high volatility and crossover indices
were wider by just less than 2 bps to 82 bps and 143 bps, respectively. Performance was similar for
the high yield index as spreads moved less than1 bp wider to 263 bps. Across the Atlantic, the iTraxx
Europe index traded about half a basis point wider week-over-week to 23.9 bps. Similar to North
America, the European high volatility and crossover indices were less than 1 bp wider on the week to
47 bps and 221 bps, respectively. Emerging market index spreads are almost 2 bps tighter than they
were in mid-December, but widened slightly to 112 bps last week.
Fitch releases Global CDO Outlook for 2007. Derivative Fitch released a special report providing
its review and outlook on CDOs in the U.S., Europe, and Asia.1 According to the rating agency,
“cross-pollination of ideas between continents” continues as traditional cash investors grow more
comfortable with the synthetic markets. Globally, rating performance remained strong, as 367 CDO
tranches were upgraded and 188 tranches were downgraded (1.95:1) as of the end of October.
According to Fitch, U.S. cash flow and synthetic CDO issuance reached $281 billion as of 2006Q3,
up 36% year-over-year. In Europe, CDO issuance was €80 billion for the first three quarters of 2006,
compared to €101 billion for all of 2005.
In the U.S., Fitch has a positive ratings outlook on CRE and Trust Preferred CDOs while it maintains
a negative rating sentiment towards Mezzanine RMBS and Diversified Structured Finance CDOs with
vintages earlier than 2003. In Europe, Fitch expects Structured Finance and SME CDOs to
demonstrate stable to positive rating trends and for the underlying asset performance to also remain
stable in 2007. On a global basis, the underlying asset performance of leveraged loan, investment-
grade bond, and high-yield bond CDOs is expected to decline, although ratings are forecasted to
remain stable to positive due to a build up of excess spread and seasoning. The agency notes that
2007 will be a year that tests the “structural soundness” of the many different CDO asset types and
that CPPI and CPDO vehicles should continue to attract investors around the globe.
S&P Sub-prime Mortgage Trends 2006Q3. Standard & Poor’s has released its sub-prime
mortgage trends report for 2006Q3 at the end of December.2 The report shows that S&P’s rated
volume of sub-prime securities was $100.6 billion in the third quarter 2006, a 15.8% decrease from
the previous quarter and a 13.4% drop year-over-year. However, the number of securities remained
inline with previous totals showing that average deal size balances are decreasing. Year-to-date,
deal volume was $337 billion, up 6% from the $317 billion rated in the same period last year. S&P
anticipates 2006Q4 volume remaining stable as longer-term mortgage products are used to help
maintain borrower affordability. In addition, trimmed profit margins for originators and servicers have
helped to spur consolidation between sub-prime companies.
S&P attributes higher mortgage rates after resets, energy costs, a slowdown in home prices in select
regions, and looser underwriting standards as the primary reasons for an increase in early payment
defaults and delinquencies on 2006 vintages. While delinquencies have increased for the both
2005 and 2006 vintages, S&P has raised its weighted average credit enhancement level over
the past year from roughly 7% for triple-B rated fixed-rate loans to 12.5% as of the end of the
third quarter. According to the report, lending practices appear to be getting tighter for longer-term
loans, interest only products, and first liens with simultaneous seconds, as FICO scores for these
products moved higher. However, purchase-money first liens with simultaneous seconds did not
show the application of a tightened lending policy. Overall, the third-quarter showed mixed results
and S&P believes that the result of tighter lending practices will take more time to show improvement.
1 Kendra K., A. Kabahar, J. Cromartie, and R. Hardee, 2007 Global CDO and Credit Derivatives Outlook,
Derivative Fitch Special Report (13 December 2006).
2 Ahn L., J. Grundy, E. Arne, and M. Perelmuter, RMBS Trends: Results Mixed for Tightened Underwriting in U.S.
Subprime Securitization Market, Standard & Poor’s (26 December 2006).
(2)
Nomura Fixed Income Research
S&P Publishes U.S. Corporate Bonds Outlook. According to S&P’s recently released 2007
corporate bond outlook, full-year 2006 corporate bond issuance was $886 billion, up 35% from 2005.3
Investment-grade issuance in 2006 was $764 billion, up 32% year-over-year and high-yield issuance
was $122 billion, up 53% year-over-year. Strong demand for corporate paper has allowed the
increased issuance to be absorbed without widening spreads. Looking to 2007, S&P believes
issuance could top the $900 billion mark as M&A activity may continue to grow. However, one factor
that may slow corporate primary activity is the effect of a rising interest environment that may have
motivated many companies to preemptively fund their borrowing costs.
S&P expects corporate credit quality to gradually deteriorate and for a macroeconomic slowdown to
begin to squeeze profitability. S&P anticipates the Fed not taking any action on interest rates through
mid-2007 and for strong foreign demand to keep long-term rates low, which should keep the yield
curve flat. Although the downgrade to upgrade ratio for 2006 appears inline with 2005’s result, 25%
of issuers currently have a negative outlook or negative creditwatch status. There is also a strong
divide in issuer ratings with negative implications, as 18% of high grade companies compared to 29%
of high-yield issuers have a negative rating status. S&P forecasts the speculative grade default rate
reaching 2.5%-3.0% by late 2007, up from just 1.33% in November. An up-tick in defaults should
place pressure on high-yield spreads. S&P expects high-yield spreads to widen from their tight of
347 bps on December 15, 2006 to a forecasted value of 400 bps in late 2007. Although the default
rate is expected to creep upwards by year-end and credit quality is expected to weaken over the
medium-term, S&P believes that over the short-run spreads on CDS have the potential to move
tighter as a result of strong demand.
3 Vazza D., P. Jain, and C. Miller, Outlook for U.S. Corporate Bonds: 2007 Credit Twist, Standard & Poor’s (21
December 2006).
(3)
Nomura Fixed Income Research
II.
Recent Pricing and Pipeline
Size
Collateral
Rating
Issue
Date
Assets
Lead
Class
(mm)
Manager
(M/S/F)
WAL
Spread
Niagara
Waterfall
1/4
$500.00
ABS IXIS
CDO
AM
410.0
A
Aa2/AA/-
3.0
+70/3ML
90.0
Pref
-/-/-
-
-
Fiorente
VERO
HG
12/28 $850.00
RBS
Funding
Capital
ABS
722.500
Senior
-/-/-
-
-
63.750
A
Aaa/AAA/-
8.9
+43/3ML
34.000
B
Aa2/AA/-
8.9
+53/3ML
14.450
C
A2/A/-
8.9
+135/3ML
8.075
D
Baa2/BBB/-
8.7
+320/3ML
7.225
Eq
-/-/-
-
-
ZS
Highridge
12/22 $1,500.00 Structured
HG SF
ML
ABS CDO
Credit
1,297.5
A1
Aaa/AAA/-
7.0
+23/1ML
52.5
A2
Aaa/AAA/-
7.1
+43/3ML
85.5
A3
Aaa/AAA/-
7.1
+47/1ML
13.0
B
Aa2/AA/-
7.1
+52/3ML
14.0
C
Aa3/AA-/-
7.1
+62/3ML
14.5
D
A2/A/-
7.1
+155/3ML
15.0
E
Baa2/BBB/-
6.8
+350/3ML
7.7
Pref
-/-/-
-
-
Tricadia
Tricadia
ABS
12/22 $513.55
BAS
CDO 2006-7
CDO Mgmt
CDO
7.70
A-X
Aaa/AAA/-
3.9
-
-
A-1F
Aaa/AAA/-
8.0
-
328.50
A-1U
Aaa/AAA/-
8.0
+30/3ML
65.00
A-2
Aaa/AAA/-
8.0
+70/3ML
43.00
B
Aa2/AA/-
8.0
+90/3ML
25.00
C
A2/A/-
8.0
+210/3ML
19.00
D
Baa2/BBB/-
8.0
+380/3ML
7.20
E
Baa3/BBB-/-
8.0
+500/3ML
7.00
F
Ba2/BB/-
8.0
+700/3ML
11.15
SN
-/-/-
- Not Offered
Black
Black
Diamond
12/22 $1,000.00
Loans BS
Diamond
2006-1
15.0
X
Aaa/AAA/-
3.8
-
500.0
A-D
Aaa/AAA/-
7.1
+25/3ML
61.5
A-E
Aaa/AAA/-
7.6
-
75.8
A-R
Aaa/AAA/-
7.6
-
90.0
B
Aa2/AA/-
8.1
+39/3ML
48.0
C
A2/A/-
8.1
+69/3ML
55.0
D
Baa2/BBB/-
8.1
+145/3ML
45.0
E
Ba2/BB/-
8.1
+350/3ML
89.0
PS
-/-/-
-
-
Lexington
Harding
Capital
12/22 $1,212.18
MZ SF
ML
Advisory
Funding III
480.000
A1
Aaa/AAA/-
5.8
+10/3ML
240.000
A2
Aaa/AAA/-
6.1
+40/3ML
160.500
A3
Aaa/AAA/-
6.1
+43/3ML
70.725
B
Aa2/AA/-
6.1
+52/3ML
50.200
C
Aa3/AA-/-
6.1
+65/3ML
40.000
D
A2/A/-
6.1
+180/3ML
35.650
E
A3/A-/-
6.1
+200/3ML
47.850
F
Baa2/BBB/-
5.7
+350/3ML
12.000
G
Baa3/BBB-/-
5.7
+400/3ML
75.250
Pref
-/-/-
-
-
(4)
Nomura Fixed Income Research
Size
Collateral
Rating
Issue
Date
Assets
Lead
Class
(mm)
Manager
(M/S/F)
WAL
Spread
Silver Point
12/21 $795.00
Silver
Point
Loans IXIS
SPF – I
250.0
A
Rev
Aaa/AAA/-
6.0
+33/3ML
245.0
A
Trm
Aaa/AAA/-
6.0
+28/3ML
45.0
B
Aa2/AA/-
7.4
+52/3ML
45.0
C
A2/A/-
7.7
+95/3ML
45.0
D
Baa2/BBB/-
8.1
+225/3ML
165.0
Eq
-/-/-
-
-
STACK
MZ
12/21 $900.00
TCW
AM
MS
2006-2
MBS
585.0
SS
-/-/-
-
-
75.0
II
Aaa/AAA/-
6.6
+52/3ML
105.0
III
Aa2/AA/-
6.8
+60/3ML
21.0
IV
Aa3/AA-/-
7.0
+70/3ML
27.0
V
A2/A/-
7.0
+175/3ML
42.0
VI
Baa2/BBB/-
7.0
+400/3ML
11.0
VII
Ba1/BB+/-
7.1
+725/3ML
19.0
Eq
-/-/-
-
-
Highland
HG
Citation-1 12/21
$1,100.00
CS
Financial
ABS
940.5
A1 Aaa/AAA/-
7.0
-
105.5
A2
Aaa/AAA/-
7.0
+43/1ML
23.0
B1
Aa2/AA/-
7.0
+52/1ML
12.0
B2
Aa3/AA-/-
7.0
+63/1ML
4.5
C
A2/A/-
7.0
+145/1ML
11.0
D
Baa2/BBB/-
5.9
+345/1ML
8.0
Eq
-/-/-
-
-
Attentus
Attentus
REIT
12/20 $506.00
ML
CDO III
Mgmt
TruPs
150.0
A1A
Aaa/AAA/AAA
7.8
+32/3ML
100.0
A1B
Aaa/AAA/AAA
9.9
+40/3ML
100.0
A2
Aaa/AAA/AAA
9.9
+45/3ML
34.0
B
Aa2/AA/AA
9.9
+70/3ML
16.0
C1
A2/A/A
9.9
+135/3ML
15.0
C2
A2/A/A
9.9
Fx 6.312%
10.0
D
-/A-/A-
9.9
Fx 6.612%
15.0
E1
-/BBB/BBB
9
+295/3ML
7.0
E2
-/BBB/BBB
9
Fx 7.982%
3.0
F1
-/BB/BB
9
+450/3ML
21.0
F2
-/BB/BB
9
Fx 9.532%
35.0
Pref
-/-/-
-
-
Shasta CLO
Churchill
12/20 $450.00
Loans BS
2006
Pacific
7.00
X
Aaa/AAA/-
3.8
-
296.00
A-1L
Aaa/AAA/-
7.7
-
45.00
A-1LV
Aaa/AAA/-
7.7
-
38.00
A-2L
Aa2/AA/-
8.2
+40/3ML
26.00
A-3L
A2/A/-
8.2
+69/3ML
18.00
B-1L
Baa2/BBB/-
8.2
+140/3ML
18.00
B-2L
Ba2/BB/-
8.1
+355/3ML
35.66
Eq
-/-/-
-
-
Guggenheim
Guggenheim
12/20 $500.00
CRE DB/BS
2006-4
Partners
265.000
A1
Aaa/-/AAA
5.9
+28/1ML
36.250
A2
Aaa/-/AAA
6.5
+32/1ML
43.375
B
Aa2/-/AA
7.0
+40/1ML
26.875
C
A1/-/A+
7.4
+55/1ML
14.375
D
A2/-/A
7.6
+65/1ML
13.375
E
A3/-/A-
7.8
+80/1ML
13.375
F
Baa1/-/BBB+
7.8
+105/1ML
15.000
G
Baa2/-/BBB
7.8
+130/1ML
10.625
H
Baa3/-/BBB-
7.8
+175/1ML
10.625
J
-
-
Retained
23.750
K
-
-
Retained
26.250
PS
-
-
Retained
6.000
S
Aaa/-/AAA
2.6
+35/Sw
(5)
Nomura Fixed Income Research
Size
Collateral
Rating
Issue
Date
Assets
Lead
Class
(mm)
Manager
(M/S/F)
WAL
Spread
Grant Grove
12/20 $300.00 Tall
Tree Loans GS
CLO
220.50
A
Aaa/AAA/-
8.1
+25/3ML
18.00
B
Aa2/AA/-
10.1
+45/3ML
15.75
C
A2/A/-
10.8
+70/3ML
14.25
D
Baa2/BBB/-
11.2
+150/3ML
9.00
E
Ba2/BB/-
11.8
+375/3ML
22.50
Sub
-/-/-
-
-
Crystal River
Hyperion
Re-Sec
12/19 $327.884
CMBS DB
Brookfield
2006-1
222.5
A
Aaa/AAA/AAA
9.19
+36/L
35.1
B
Aa2/AA/AA
10.01
+50/L
17.6
C
A1/A+/A+
10.02
+67/L
19.5
D
A3/A-/A-
10.12
+85/L
10.7
E
Baa1/BBB+/BBB+
10.51
+140/L
9.3
F
Baa2/BBB/BBB
11.33
+190/L
4.4
G
Baa3/BBB-/BBB-
11.35
+220/L
5.9
H
-/BBB-/BBB-
11.43
-
Sherwood
Church
MZ
MS/
12/18 $500.00
Funding-3
Tavern Adv
ABS
JPM
323.0
SS
-/-/-
-
-
59.0
A1
Aaa/AAA/-
-
+43/3ML
551.0
A2
Aa2/AA/-
-
+53/3ML
18.0
A3
A2/A/-
-
+155/3ML
24.0
B
Baa2/BBB/-
-
+335/3ML
7.0
C
Ba2/BB/-
-
+675/3ML
18.0
Eq
-/-/-
-
-
New Pipeline
Size (mm)
Collateral Manager
Assets
Lead
Acacia CDO 11
$500.00 Redwood Asset mgmt
RMBS
LB
Camber 7*
$900.00 Cambridge Place
MZ SF
BarCap
Declaration Mgmt &
MZ ABS
DMR Draco 2007-1**
$2,000.00
UBS
Research
Foothill CLO I
$500.00 Foothill Group
Loans
DB
Gulf Stream Strucutred
Gulf Stream-Atlantic 2007-1
$500.00
RMBS RBSGC
Advisors
Latitude CLO
$300.00 Lufkin Advisors
Loans
BarCap
Libertas Preferred Funding II*
$506.00 Strategos Capital
SF
BS
ZS Structured Credit Cap
Longride ABS CDO II*
$500.00
RMBS RBSGC
Mgmt
Stanfield Daytona Ltd.
$550.00 Stanfield Capital Partners
Loans
BS
Symphony COF
$500.00 Symphony Asset Mgt
Loans/HY/Converts
MS
* denotes synthetic; ** denotes hybrid deals.
Source: MCM, IFR, Bloomberg
(6)
Nomura Fixed Income Research
III. Spreads
Index Constituent
5-Jan
Last week Moody's Rating S&P's Rating
5Y CDS Index
5-Jan Last week
Change
AIG
9
9
Aa2
AA
CDX.NA.IG 7
34.18
33.57
+0.61
Alcoa
16
16
A2
A-
CDX.NA.IG HVOL 7
81.51
79.71
+1.80
Altria Group
23
24
Baa1
BBB
CDX.NA XO 7
142.33
140.95
+1.38
Boeing
9
9
A2
A+
CDX.NA HY 6
262.96
262.43
+0.53
CIT Group
26
27
A2
A
CDX.EM 6
111.53
111.13
+0.40
Deere & Co
17
18
A3
A
iTraxx Europe 6
23.88
23.41
+0.47
Dow Chemical
13
16
A3
A-
iTraxx Europe HVOL 6
47.06
46.19
+0.87
Duke Power Co
16
16
A3
BBB
iTraxx Europe X-over 6
220.70
219.83
+0.87
Fannie Mae
7
7
Aaa
AAA
iTraxx CJ Japan 6
21.60
21.69
-0.09
Ford Motor Credit
283
285
Caa1
CCC+
iTraxx Asia ex-Japan 6
38.88
39.63
-0.75
GE Capital
12
12
Aaa
AAA
iTraxx Australia 6
31.87
31.87
+0.00
GMAC
99
97
Ba1
BB+
iTraxx SDI-75 3
30.83
30.81
+0.02
IBM
9
9
A1
A+
CDX IG 7 Widest
5-Jan
McDonalds
13
13
A2
A
Sabre Hldgs Corp
302
Time Warner
31
31
Baa2
BBB+
Clear Channel Comms Inc
251
Tyson Foods
102
98
Ba2
BB+
RadioShack Corp
204
Viacom
68
69
Baa3
BBB
Harrahs Oper Co Inc
184
Walt Disney
11
11
A3
A-
The Gap Inc
133
Xerox Corp
59
58
Baa3
BB+
CDX IG 7 Tightest
5-Jan
AKZO Nobel N V
28
26
A3
A-
Wel s Fargo & Co
6
AXA
11
11
A2
A
Amgen Inc.
7
Brit Telecom PLC
48
49
Baa1
BBB+
Fed Natl Mtg Assn
7
Cadbury Schweppes
40
39
Baa2
BBB
Wal Mart Stores Inc
7
Carrefour
12
12
A2
A
Baxter Intl Inc
8
DaimlerChrysler AG
53
53
Baa1 /*-
BBB
iTraxx Europe Widest
5-Jan
Deutsche Telekom AG
37
38
A3
A-
Glencore Intl AG
85
France Telecom
28
29
A3
A-
ITV Plc
75
GUS PLC
44
45
Baa1
BBB+
RENTOKIL INITIAL PLC
74
Koninklijke Ahold N V
82
79
Ba1
BB
Valeo
69
Lafarge
31
32
Baa2
BBB
Koninklijke KPN N V
68
METRO AG
29
28
Baa2
BBB
iTraxx Europe Tightest
5-Jan
Renault
32
32
Baa1
BBB+
Royal Bk Scotland plc
4
Suez
25
19
A2 /*+
A- /*+
ABN AMRO Bk N V
6
Telecom Italia SpA
63
63
Baa2
BBB+
Barclays Bk plc
6
Telenor ASA
19
20
A2
BBB+
Aviva plc
7
Volkswagen AG
26
27
A3
A-
Assicurazioni Generali S p A
7
Single-name CDS spreads are on a "XR" basis (without restructuring) for North America.
Source: Markit and Bloomberg
ABX.HE Index (as of January 5, 2007)
Price
Weekly change (bps) Spread* (bps) Coupon (bps)
ABX.HE.AAA.06-2 100.09
-0.01
8.85
11
ABX.HE.AA.06-2 100.09
unch
14.31
17
ABX.HE.A.06-2 99.12
+4.89 72.57
44
ABX.HE.BBB.06-2 95.42
+33.18
292.76
133
ABX.HE.BBB-.06-2 93.53
+64.33
476.91
242
CMBX.NA Index (as of January 5, 2007)
Spread Weekly change (bps)
Coupon (bps)
CMBX.NA.AAA.06-2 5.50
+0.85
7
CMBX.NA.AA.06-2 12.00
unch
15
CMBX.NA.A.06-2 18.92
unch
25
CMBX.NA.BBB.06-2 52.00
-0.14
60
CMBX.NA.BBB-.06-2 85.67
+0.74
87
CMBX.NA.BB.06-2 194.83
+3.26
180
Note: * assuming 35% CPR,
Source: Markit and Nomura Securities International
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