Bloomberg: Barclays Said to Repackage Top-Rated Bonds From Downgraded CDO
Sept. 3 (Bloomberg) — Barclays Capital repackaged a portion of a $1 billion collateralized debt obligation managed by Highland Capital Management LP that was downgraded in July into new securities with the highest credit ratings.
Barclays Capital is selling $77.25 million of securities backed by leveraged loans with AAA rankings from Standard & Poor’s and Moody’s Investors Service, said a person familiar with the offering who declined to be identified because the deal is private. The bank also created an $18.8 million piece rated AAA by S&P and a $250,000 unrated slice, according to the bond agreement.
Banks are turning downgraded securities into new investments with top credit ratings, seeking to create more valuable debt to sell or to restructure investors’ holdings. New York-based Barclays Capital is modeling the financing structure after so-called re-REMICs, which bundle mortgage bonds into new securities that may offer investors an additional layer of protection, or collateral, from downgrades.
“Critics of this practice have argued that it appears to be the creation of something from nothing — in effect ‘alchemy,’” Moody’s analyst Leonid Mogunov wrote in an August report. “Such repackaging can in fact produce at least one class of notes more creditworthy than the underlying CLO tranche,” he wrote.
The new bonds, known as Blue Wing Asset Vehicle, were created from the safest portion of Westchester CLO Ltd., a $1 billion CDO arranged in May 2007 by Lehman Brothers Holdings Inc. and managed by Dallas-based Highland.
Brandon Ashcraft, a Barclays spokesman in New York, declined to comment. Kevin Latimer, a partner at Highland, didn’t return a telephone call for comment.
‘Arbitrage Opportunities’
Credit-rating cuts may sometimes force investors to sell the debt and cause financial institutions that own the bonds to increase capital. More than $27 billion of home-loan bond re- REMICs were issued this year, according to a June report by Bank of America Corp., compared with $17 billion in all of 2008.
CDOs parcel fixed-income assets such as bonds or loans and slice them into new securities of varying risk intended to provide higher returns than other investments of the same rating. Westchester is a type of CDO called a collateralized loan obligation, or CLO, which focuses on doing the same with company loans.
“Repackaging is typically a regulatory maneuver,” said Gene Phillips, a director at PF2 Securities Evaluations Inc., an advisory firm in New York. “Some investors are also unable to hold securities that are rated below AAA.”
Moody’s lowered the $570.5 million top-ranked piece of Westchester CLO by three levels in July, to Aa3 from Aaa, citing an increase in defaults and low-ranking company loans. The ratings company has cut 2,560 portions from more than 650 loan CDOs this year through July 31.
“We expect to see more repacks as AAA downgrades have increased,” Phillips said.
To contact the reporters on this story: Pierre Paulden in New York at ppaulden@bloomberg.net
