Maiden Lane III bidding flurry may be one-off
Last week saw a flurry of bids for a set of American International Group (AIG) collateralized debt obligations held by the Federal Reserve Bank of New York.
Bonds linked to the wider commercial backed mortgage securitization market also experienced a major uptick in trading, according to reports.
Private equity houses, hedge funds and, to a lesser extent, life insurance companies all tried to get in on the action. However, now that this portion of commercial assets under the MAX CDO/MLIII is allocated to winning joint bidders Barclays Capital (BCS) and Deutsche Bank (DB), the CMBS market once again has settled down, maybe for good.
"With MAX out of the way, investors and dealers are now able to turn their collective attention back to more mundane, every-day activities including trading bonds in the secondary market and analyzing new issue transactions, two of which totaling $2.4 billion priced over the past two weeks," said analysts at Bank of America Merrill Lynch (BAC).
In an analysis of the market events, Deutsche Bank said the trading shows the CMBS market is willing to trade large amounts of bonds in order to maintian levels of liquidity. They added they did not think these investors are interested in flipping the bonds back into the market for short-term profit.
Nonetheless, the remaining MLIII assets may not pull the same amount of attraction as the latest offering. "The remaining assets of the vehicle are not as attractive to investors or dealers due to the smaller size and additional complexity so it could very well be that we have seen the last auction. For the CMBS market at least, we will not see anything like this past week’s events for a long time, perhaps ever," they concluded.
The Fed opened bidding to eight investment banks two weeks ago. The CDOs are linked to commercial mortgage-backed securities and were acquired by the New York Federal Reserve as part of the bailout of AIG. The assets fall under the Maiden Lane III portfolio.
The BofA analysts said the MLIII bidding is still a positive sign for the market.
"Spreads rallied following the successful auction of the MAX CDO, which showed that not only was the market able to absorb that amount of volume, but that there was broad investor interest given that the winning bid was higher than many investors anticipated," they said.
The New York Fed is not finished with its AIG assets and holds a remaining balance of $8 billion.