What started off as a quiet list that was supposed to be sent to a couple dealers has now spread like wild fire around bond investors.
A forthcoming, massive collateralized debt obligations deal is being offered in a large $8.7 billion list comprised of five all-or-none packages. The bonds are coming from five CDOs, PICAR 2009-1A to 5A, backed by residential mortgage-backed securities, sources told HousingWire.
The idea is if this esoteric deal prices and performs well, it’s a good sign of a return to risk for investors.
Dealers are suggesting that the seller is a European bank and that the majority of the securities are junk. Credit ratings agencies are not expected to reassign ratings to the older, seasoned bonds.
“It’s definitely a large amount of supply hovered and it’s a been pretty good solid demand for investors,” a source familiar with the deals told HousingWire. “There’s a lot of money being raised to chase after this asset class and to chase after housing recovery trade.”
While the majority consensus is that investors are excited to get a slice of the deal, there is the risk of how the bonds will be taken down.
The deals are larger transactions with the underlying is CUSIP nonagency securities. A dealer can take down the big tranche and then they can split up the pieces and sell each piece separate — the individual bonds that are underlying.
Then, all these deals will go out and collect bids on the different securities of the underlying with the intent to take down the larger tranche and then split up the pieces and sell them to the highest bidder.
If one dealer controls the sale and takes down all of the securities and eventually sells the bonds over time, it will provide a smooth process for investors that may not necessarily put pressure on prices.
However, the risk may be if a bunch of different dealers take down different tranches and then try to sell the securities at various prices.
“If one person controls the situation, they can control the prices at which they sell, but if two or three different players step in to buy securities now there’s this mood of a flood of supply from different dealers that can put more pressure on prices,” the source explained.
They added, “That’s the biggest thing that I see out there is that potential risk, but other than that there’s been absolutely a tremendous amount of demand for this product and all fixed income products given the activities with the Fed and their quantitative easing process.”