Lone Star Funds is marketing its USD 426.18m COLT 2017-2 RMBS with an unusual pricing option to draw more investors, according to two investors who have reviewed the issue.
Each class from the deal backed by Caliber Home Loans QM and non-QM originations is being offered in a variety of coupons, the sources said. Investors can choose a higher coupon, with a trade-off of a premium price that exposes them to prepayment risk, they said.
The deal’s A-1A, A-1B and A-1C senior classes will be priced at par, 100-16 and 101, respectively, with spread guidance at S+ 75bps, S+ 85bps and S+ 95bps, the sources said. The total USD 255.71m in A-1s are expected to be rated AAA, with 40% of credit support, according to a Fitch presale report.
The USD 48.37m in AA rated A-2A, A-2B and A-2C classes were guided at S+ 90bps, S+ 100bps and S+ 110bps, respectively. Another USD 52.63m in A rated A-3A, A-3B and A-3C bonds were guided at S+ 110bps, S+ 120bps and S+ 130bps.
Lone Star is also selling USD 25.39m in BBB rated M-1s, with guidance of S+ 165bps, the sources said. Another USD 20.24m in BB rated B-1s could pay S+ 285, based on guidance circulated as of Monday.
Slicing up the classes may be a sign that some investors have begun to balk at low yields after more than a year of spread tightening, one investor said. Lone Star in April sold seniors from its COLT 2017-1 issue at S+ 95bps, which at the time was a record for a new issue non-QM deal, as reported. Seniors from the more recent AOMT 2017-2 non-QM RMBS priced in July at S+ 80bps, as reported.
Investors “want more cash-flow,” one of the investors said. They could also be betting that prepayments will be slower or faster than expected, he said.
In another investor-friendly move, Lone Star based the deal’s delinquency trigger on current month performance instead of the usual rolling six-month average, according to the Fitch presale. The deal is also backed by only fully documented loans, instead of including many to borrowers who proved their income with as few as a single month’s bank statement, as reported (see article, 7 September).
Credit rating companies frowned on the deal’s representations and warranties, in part because it requires no automatic review of defaulted loans as there typically is in RMBS backed by higher-quality collateral, as reported.
Spokespeople from Lone Star and lead manager Credit Suisse declined to comment.
by Al Yoon