This is Kent Funding I, a $1bn asset-backed CDO issued by Declaration Management back in 2005:
That is, that was Kent Funding I, since the CDO is reportedly about to be liquidated after hitting an event of default on June 4. The same thing happened last summer with the CDO’s sister deal, Kent Funding II, hitting an event of default on June 11.
From a June 2008 Bloomberg story:
Downgrades to mortgage bonds and their underlying securities triggered so-called events of default on 200 CDOs since October, including Rosemont, Illinois-based Deerfield’s Knollwood CDO Ltd. and Kent Funding II, managed by Declaration in McLean, Virginia, Wachovia analysts wrote yesterday.
Kent Funding II’s default helped push the collective amount of CDOs in default to something like $220bn at June 2008, according to those Wachovia estimates. Once an asset-backed CDO hits an event of default, bondholders typically can vote to liquidate the CDO’s holdings or accelerate payments on certain tranches.
A key difference between Kent I and Kent II, however, is that while both of the CDOs hit events of default only the bondholders of Kent I appear to have voted to liquidate. Kent II goes on, though it (predictably) suffered a rash of downgrades post-default.
Why the difference? What, perhaps, changed between 2008 and 2009?
Here are some thoughts from Asset-backed Alert (ABA):
Of course, troubled CDOs have been unwinding all throughout the financial crisis. But a growing number of investors in those vehicles are expected to push for liquidations in the next 6-12 months, as the debt market’s struggles continue. In many cases, they could be swayed toward such maneuvers by one of the same factors influencing the market’s healthier sellers – a desire to take advantage of the recent pricing rally. According to Wells Fargo researchers David Preston and Justin Pauley, CDOs with face values of $352 billion have hit events of defaults since October 2007. Of those deals, $117 billion have already liquidated, and $7 billion are in the process of unwinding. Another $123 billion are on accelerated payment schedules that don’t yet call for large-scale asset sales, and $105 million have yet to determine their courses of action.
If a sudden influx of CDO asset-sellers hits the market, whether those sellers are being forced to liquidate or are trying to take advantage of higher prices (mortgage-bond prices are up about 50 per cent since their February lows, according to ABA), you could have a situation where supply exceeds demand. If that were to happen, it could put further downward pressure on mortgage-bond prices, and ironically lead to more CDO defaults.
Back to ABA:
Still, buyers are skittish about a weak housing market and high unemployment. They also want to see the government actually follow through with PPIP’s mission of removing so-called legacy bonds from financial institutions’ balance sheets. Plus, they’re aware that supply and demand could soon be thrown off balance. “People know there’s selling coming, and that’s where the nervousness comes in,” said Hiram Matthews, head of structured-product trading at New York investment-banking firm CastleOak Securities. The question is to what degree the coming supply can be offset by optimism gleaned from the PPIPand general economic improvements. One buysider said indications point toward an overload of offerings. “That’s why prices are not going to stay where they are,” he said.
Related links:
Coming sales threaten mortgage-bond gains – Asset-Backed Alert
Insight: Time to expose those CDOs – FT