November 7, 2014 / 7:16 PM / 5 years ago

Deal rules block auction of vintage CDO

NEW YORK, Nov 7 (IFR) - Strict rules governing a 10-year-old US$380m CDO left distressed debt investors frustrated this week after a failed auction of the deal kept potentially valuable bonds locked up in the vehicle.

The Fairfield Street Solar 2004-1, a commercial real estate (CRE) CDO inked in 2004, is coming up to its weighted average life in November.

At this 10-year anniversary, the trustees are obliged to solicit bids for the assets, but they can only sell the security as a whole - and only if proceeds raised in an “auction call” process pays them off at par.

Bids on the underlying collateral were due on Wednesday, and the auction would have gone off on Friday if the minimum cash purchase price had been met.

According to a bid sheet seen by IFR, that had been set at US$298.75m plus any outstanding fees and expenses owed.

Although investors were keen to get their hands on some of the underlying 72 pre-crash bonds, the attempt proved futile as too many of the assets have little chance of recouping their losses.

“It (seemed) unlikely to us that the auction would be successful in accomplishing that,” one investor said this week.

“The trustee may attempt another auction call in the future, which may or may not be successful. (But) there will not be a partial sale of the pool, per the auction call mechanism.”


Some bonds - if they fall into the right hands and match securities already in an investor’s portfolio - could offer upside from their current distressed levels. Potentially they could provide control rights over the servicing of soured CMBS deals.

Legacy CDOs are also usually packed with hard-to-find junior Triple A bonds that trade at a discount but at attractive coupons.

The problem, however, is that the deal also includes a lot of bonds that people just don’t want to touch if they have to pay full price.

On the block in total were US$298m in CMBS, US$38.8m in CDO notes, US$19.5m in re-REMIC bonds, US$13.3m in REIT securities and some other subordinate whole loans.

Slices of mezzanine debt look particularly dicey, quoted as low as ten cents on the dollar.

A US$3m slice of a mezzanine H tranche of pre-crash JP Morgan deal JPMCC 2005-LDP2, for example, saw talk of just 27.30 cents on the dollar in September, according to Empirasign, an ABS and MBS bond trading data provider.

While Standard & Poor’s, which rated the deal, has not looked at the pool lately, the agency downgraded 12 classes of the CDO in May 2011 due to a deterioration in the credit quality of the assets.

The notes were cut again in August 2012 as the agency tightened its criteria for CDOs backed by structured finance transactions.

There now appears to be a stalemate after the auction, suggesting that the CDO will now just bump on, potentially through to its final maturity in 2039 - if it does not hit par at any stage.

To that extent, it’s not alone.

Fourteen of the 20 CRE CDOs completed in 2004 are still outstanding, according to Trepp. It is unclear, though, how many of those were structured with the same sale restrictions as the Fairfield deal.

MFS Investment Management, an arm of Massachusetts Financial Services, is the deal’s collateral manager and will continue to manage the Fairfield CDO. A spokesperson declined to comment. (Reporting by Joy Wiltermuth; Editing by Natalie Harrison and Anil Mayre)

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