I don't know what that is. Tranche, what?
Posted on 04/15/2008 12:27:21 AM PDT by bruinbirdman
“Tranche warfare” has broken out in the $450bn market at the heart of the credit crunch as hard-hit investors scrap over the pools of debts that make up so-called collateralised debt obligations.
Some investors in the differently rated and ranked slices of CDOs – known as tranches – have taken advantage of the little-noticed terms in the structuring of such instruments to seize control of the assets and cut off payments to other debt-holders.
Such conflicts have resulted in lawsuits as investors question the rights of others, such as senior noteholders who supposedly hold the least risky tranche of a CDO. Trustees of some debt, including Deutsche Bank and Wells Fargo, have filed suits aimed at ensuring money continues to be paid to holders of the credit instruments.
“Investors agreed to terms which give senior noteholders control following certain triggers because they thought these were never going to happen,” said Ed O’Connell, a partner at Jones Day, a law firm. “Many CDOs are now hitting the triggers. This is creating conflicts of interest and losses and an uptick in litigation, too.”
The fights between tranche owners is another example of how little attention investors paid to the exact terms and conditions in the rush to complete CDO deals.
It also highlights the potential for stress in the structured finance market, as ratings downgrades of assets backing bonds in turn trigger more losses or ratings downgrades.
Specifically, downgrades of some of the bonds backing CDOs are triggering little-noticed “event of default” clauses, which often allow senior noteholders to take control of all the income.
Senior noteholders can then accelerate payments from the CDO, which leaves other investors with the prospect of no interest payments for months or years, and also gives them no say in whether or not the instrument should be liquidated.
The value of CDOs backed by risky subprime mortgages has plunged with the downturn in the US housing market. This is one reason for massive writeoffs on investments at banks, which hold many of the senior CDO notes.
“A good portion of the banking sector’s writedowns to date stem from super-senior holdings,” says Vishwanath Tirupattur, a strategist at Morgan Stanley.
“Thus far, a majority of deals being liquidated are ones where banks are super-senior holders. There is an incentive to liquidate and not endure further pain.”
I don't know what that is. Tranche, what?
A tricky way of saying trench, a big ditch that they toss investors in, like a giant mass burial!
Some banks...keep the mortgages they write. But most other originators sell them to investment banks that package and "securitize" them. And because the originators make their money from fees and from selling the loans, they don't have much at risk if borrowers can't keep up with their payments.Instead of packaging entire mortgages, Wall Street came up with the idea of dividing them into "tranches." The safest tranche, which offers investors a relatively low interest rate, will be the first to be paid off if too many borrowers default and their houses are sold at foreclosure auction. The owners of the riskiest tranche, in contrast, will be the last to be paid, and thus have the biggest risk if too many houses are auctioned for less than the value of their loans. In return for this risk, their bonds offer the highest yield.
Oops source: http://www.rgemonitor.com/blog/roubini/183467
Tickles me just pinky. Kinda like watching a bunch of dogs fightin’ over a dead rabbit.
>> “Investors agreed to terms which give senior noteholders control following certain triggers because they thought these were never going to happen,” said Ed O’Connell, a partner at Jones Day, a law firm. “Many CDOs are now hitting the triggers. This is creating conflicts of interest and losses and an uptick in litigation, too.”
This is reminiscent of the homeowner insurance conflicts in Mississippi and Louisiana. Homeowners turned to the courts to try to force insurance companies to pay claims for which they were not contractually liable.
When is a contract not a contract? When the vermin class (government plus trial lawyers) redefine it in court to better reflect what they “feel” the contract should have meant, instead of enforcing what is SAYS.
The international bankers used this to indicate a loan advance or draw.
Fine.
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