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NY Life CDO sale buffeted by subprime -investors
March 9, 2007 / 9:49 PM / in 11 years

NY Life CDO sale buffeted by subprime -investors

By Walden Siew

NEW YORK, March 9 (Reuters) - New York Life Investment Management (NYLIM) can’t find enough buyers for a new $1.5 billion collateralized debt obligation, the latest sign that concerns about subprime loans is spreading to other markets, investors said.

NYLIM -- a unit of New York Life Insurance Co., a large U.S. mutual life insurer with over $235 billion in assets under management -- has sweetened its offer by as much as 50 basis points more in the past week to market an asset-backed CDO, a debt structure that diversifies risk by packaging bonds together based on credit quality.

New York Life’s “BBB”-rated tranches are being offered at about 850 basis points and “A”-rated groups are at 400 basis points over the London interbank offered rate, 50 basis points more than last week, according to investors.

“Anything with the subprime taint basically has been widening out,” said Mirko Mikelic, a portfolio manager who helps oversee $13 billion in assets at Fifth Third Asset Management in Grand Rapids, Michigan. “Anybody who deals with subprime has been whacked, and this is extending to CDO managers.”

Mikelic may participate in the sale if spreads move even wider, he said.

“There’s little to no interest in the sector,” he said. “But if you’re going to start to offer these big spreads, there’s going to be investors at some point.”

Edward Fitzgerald, fund manager for the New York Life CDO, named “Corona Borealis,” didn’t return a phone call seeking comment. Robert Dial, another fund manager for NYLIM, declined to comment and referred questions to Fitzgerald.

Other managers also may cancel deals or offer greater incentives to attract investors as concerns about the risk of loans to homeowners with bad credit mount and defaults and delinquencies rise. More than two dozen subprime lenders have gone bankrupt or quit their business in the past year.

The average size of a subprime loan has increased to $166,831 in 2006 from $85,253 in 1998, according to Bear Stearns.

Gyan Sinha, head of asset-backed research at Bear Stearns, said in a conference call in New York on Friday that implicit “put back” provisions in subprime asset-backed deals have resulted in growth in the insolvent loan portfolios.

“The market is repricing quickly to bad business models,” Sinha said.

Risks for CDOs are being reflected in “significantly wider” spreads for some CDO tranches, he said. “AAA” groupings of debt have a spread of about 50 basis points, while “BBB” tranches are at about 650 basis points, according to Bear.

Around 10 percent of $30 billion worth of ABS CDOs that had been preparing to come to market have been canceled in the past week to 10 days, according to one market participant who declined to be identified by name.

In anticipation of selling a CDO, dealers accumulate, or warehouse, the assets that will underpin the deal. These assets have lost value, making some dealers pull back on offering the so-called warehouse lines to CDO managers.

The biggest pullback has been in the mezzanine level of CDOs, which is the most exposed to lower-quality subprime loans.

“The market dislocation has really impacted ABS CDO spreads to the benefit of debt investors,” Mikelic said. “There’s too much headline risk.”

(Additional reporting by Al Yoon, Richard Leong and Karen Brettell in New York.)

((Reporting by Walden Siew; editing by Jonathan Oatis; e-mail: walden.siew@reuters.com; Reuters Messaging: walden.siew.reuters.com@reuters.net; Tel.: +1-646-223-6333)) Keywords: USA SUBPRIME/NYLIFE

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