Morgan Stanley touts zero-coupon mezz tranches

Morgan Stanley’s most recent Credit Derivatives Insights report says that with interest returning in buying credit tranches in principal-only format, mezzanine POs may be attractive to investors. It says that while a hypothetical mezz PO done before the crisis would have priced somewhere in the 80s or 90s, today the price would be in the 60s.

In reality, almost all POs put on before the crisis were on equity tranches, usually in the 10-year maturity. These have not performed well in mark-to-market terms, having typically fallen from a price of 7.3% of par on inception to below five points today. However, with equity having underperformed amid spread widening and rising dispersion, this may be a good entry point for equity POs, suggests the report.