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ABS CDOs: False dawn for ABS CDOs

ABS CDOs are back buying sub-prime ABS but all remains far from well in the asset class.

A shadow of its former self?
US mezz ABS CDO pipeline as at 21/05/07
Issuer Size ($mln) Lead
Ischus Mezz CDO IV 507 Citi
Kilts CDO 07-1 1,000 RBS GC*
Nordic Valley 07-1 1,000 CS
Pine Mountain 500 Lehman
RFC CDO 5 501 Deutsche
Stockton 1,000 WS
Source: Dresdner Kleinwort

In mid-April, Lehman Brothers reckoned that there were $18 billion to $25 billion of mark-to-market losses residing in ABS CDOs – both deals that had already closed and those still in the works. It is therefore not surprising that activity in the ABS CDO market seemed to dry up overnight; and appetite for home equity loan ABS dried up along with it. But within a few weeks the underlying market seemed to have staged a remarkable recovery; spreads in HEL ABS were tightening by eye-watering increments thanks to buying by those same ABS CDOs – happily ramping up as before.

It is hard to believe that the CDO market can shrug off a problem as large as the US sub-prime mortgage mess as easily as this.

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