Quoted from Euromoney Nov 2005Delphi’s bankruptcy shows that many of the imbalances remain in global structured credit.In mid-October equity tranches in iTraxx and CDX rallied on the back of GMAC’s CDS tightening. The iTraxx five-year 0-3% tranche tightened slightly in October when it was announced that GMAC would get its own rating. But the general trend was for equity tranches to widen after Delphi, Northwest Airlines and Delta Air Lines filed for bankruptcy protection. “Equity tranches have moved the most, although the GM news in mid-October prompted a bit of a snap-back,” says Lehman Brothers structured credit strategist Arun Singhal. “Mezzanine is too tight, so that’s where we’ll see the next repricing.” Do we need to updated our models? Why was Mezz too tight? What are potential research topics around this issues? [

any body?

couple of points there:you will always see the biggest movement in equity in these scenarios. equity tranches are most sensitive to the few widest names (like GM) so they will be driven by names like GM. Mezz has been tightening for a while though I don't think it's too tight at this point. There were people saying it is too tight a few months ago and it's come in significantly since then. Mezz tranches are affected by bespoke cdo issuance - as dealers have to go out and hedge these deals using index tranches. They have also come in simply because of the general spread tightening we have seen in the past few months. Problem is if there a large sell off all the risk will pour into the equity tranches, which means that mezz will have to stay put. You will only see mezz widening as default happen since it will become an equity tranche past 3% defaults in the portfolio.