The Federal Reserve Bank of New York is seeking bids for $7.49 billion of collateralized debt obligations linked to commercial mortgages it took on in the 2008 bailout of American International Group Inc.
The New York Fed invited eight broker-dealers to compete for the so-called MAX CDOs after receiving “several” unsolicited bids for the holdings in its Maiden Lane III LLC portfolio, it said in a statement today on its website. Bids will be due on April 26.
The district bank is considering selling securities that JPMorgan Chase & Co. (JPM) analysts estimate may be worth as much as 25 percentage points more than where the Fed values them if the buyers were to break them into individual bonds. The two CDOs, which were issued by Deutsche Bank AG (DBK) in 2007 and 2008 and bundle securities culled from 103 commercial mortgage bond deals, are estimated by the Fed to be worth $4.8 billion as of December, according to the district bank’s website.
“The value of the CMBS securities is locked in the CDO structure,” Ed Reardon, an analyst at JPMorgan in New York, said in a telephone interview. “It’s not that straightforward to understand a 300-page CDO prospectus.”
The CDOs could be sold intact or broken into pieces, though an interest-rate swap contract with Barclays Plc (BARC) would need to be paid out to access the underlying bonds, eating into profits, Reardon said.
“While this could work at the right price, the Fed may not be willing to sell the CDO bonds cheap enough to maintain the economics of collapsing the deal,” Reardon wrote in a report last week.
The Fed “will sell an asset only if the best available bid represents good value for the public, while taking appropriate care to avoid market disruption,” the district bank said in the statement today.
Relative yields on commercial-mortgage bonds surged when the Fed said it was considering selling portions of Maiden Lane III earlier this month on concern that a flood of bonds would depress values. The spread has since narrowed to 186 basis points, or 1.86 percentage points, more than Treasuries after reaching a six-week high of 206 basis points on April 10, according to a Barclays index.
“This would be the biggest individual trade in CMBS history,” said Tom Digan, head trader at Sorin Capital Management, an investment firm specializing in commercial real estate securities. “It is particularly noteworthy because it is something other than generic AAA CMBS. Having an opportunity of this size in credit-sensitive paper is likely to generate a lot of interest from both dealers and end users.”
The New York Fed halted regular and more public auctions of mortgage securities held by Maiden Lane II LLC, a separate vehicle, last year after traders blamed the sales for damaging prices in credit markets with the cost of protecting against losses on subprime housing debt and commercial mortgages soaring.
The district bank ultimately sold the entire portfolio this year after opting to hold auctions with a more limited number of dealers in response to unsolicited bids for assets.
After selling the last group of bonds in the Maiden Lane II pool in February, the New York Fed said that taxpayers earned $2.8 billion on their $19.5 billion loan to that vehicle. Credit Suisse Group AG (CSGN) and Goldman Sachs Group Inc. (GS) won those auctions, comprising securities backed by residential mortgages.
The banks invited to bid in this round are Barclays, Citigroup Inc. (C), Credit Suisse, Deutsche Bank, Goldman Sachs, Bank of America Corp. (BAC), Morgan Stanley (MS) and Nomura Holdings Inc. (8604), the Fed said in its statement.
Maiden Lane III, with a face value of $47.7 billion, was estimated to be worth $17.8 billion as of December last year, according to the Fed’s website. In addition to commercial- mortgage CDOs, the holdings include $12.7 billion in CDOs backed by other assets.
The vehicle unwound credit-default swaps that AIG had sold to protect counterparties against losses on mortgage-backed securities. The facility bought the underlying assets that AIG insured for banks, sparing the Wall Street firms from any losses. Lawmakers criticized the payments as a “backdoor bailout” of the companies.