CDOs/CLOs

While one could hardly call the CLO market healthy, the rumors of its demise may be slightly exaggerated. It's not impossible to get a CLO transaction done, though a significantly easier time will be had by all if arrangers stay realistic about pricing and forget going the market value route, sources said. This market is going for cash.

Citigroup made news last December when it decided to consolidate about $49 billion in SIV assets onto its balance sheet. In its most recent 10-K filing, released on Feb. 22, Citigroup revealed that it had consolidated significant interests in CDO assets.

Citigroup announced last week that Brian Leach will assume the role of chief risk officer, reporting to Chief Executive Officer Vikram Pandit. Leach will also become acting chief risk officer for the institutional clients group.

McDonnell Investment Management has hired Michael Herzig as the managing director of McDonnell's newly established New York office. Herzig will head up the sales and client service effort for McDonnell's Alternative Credit Strategies Business Unit and will also help direct the product development and strategy committee for the firm. Herzig will serve on the management committee of McDonnell, reporting directly to Edward Treichel, McDonnell's president and CEO. Before McDonnell, Herzig had a nine-year stint at Deutsche Bank as a managing director. He was most recently a co-head of the U.S. CDO business with direct responsibility for CLO and credit opportunity fund origination and distribution.

Alexander Rekeda joined Guggenheim Capital Markets as managing director and head of CDOs, effective today. Rekeda was previously head of structured credit, Americas at Mizuho Securities which he joined in November 2006. Mizuho dismissed its entire CDO-underwriting group in mid-December 2007, including Rekeda as well as 13 others, who all left Calyon for positions at Mizuho only one year prior. Rekeda had built up the cash CDO business at Calyon, where he had had been since July 2004.

This morning DBRS announced that it is expanding its U.S. structured finance market service. "In a continuing effort to provide value to the market, DBRS has announced the expansion of its U.S. structured finance market services in providing credit assessments," the rating agency said in a statement. "These assessments, which cover a variety of asset types, better allow institutions to value market risks in their portfolios." The release also said that institutions are encouraged to contact the rating agency for more granular analysis on their portfolios. It added that in "such difficult times, leadership, stability and credibility are necessities for the credit markets."

Dechert has laid off 13 associates in its finance and real estate group. The associates were offered three options: to accept the severance package, stay 60 days in another group and then take the severance, or to stay in the new position, although there is no guaranty on the length of stay in that position. Under the third option, some of the associates could end up permanent, but if they stay longer than 60 days, the current severance package does not apply. In a report from lawyer.com, a statement from Dechert Chairman Barton J. Winokur was published. "Due to the major shift in market conditions affecting client demands in our finance and real estate practice area, we currently do not have sufficient work for all the associates in FRE," Winokur said in the statement. "As a consequence, we have told 13 associates in the U.S. FRE group that we see no demand for them in that group in the foreseeable future. However, due to increased and substantial demand in other practice areas, we will be offering those lawyers the opportunity to work in those other groups."

Fitch Ratings looked at the potential impacts that a monoline split could have on the protection bought by banks from the financial guarantors, including on structured finance CDOs. The rating agency also examined the effects on the financial guarantors themselves. "The current situation is highly fluid," said Jim Batterman, a managing director at Fitch. What the market is concerned about is that a negative reassessment of financial guarantor counterparty risk might effectively result in a significant reversal of mark-to-market gains for the institutions, such as banks, that bought protection from the financial guarantors, Batterman added. Further, while some of these same protection buyers might have also hedged their counterparty exposure to the financial guarantors by purchasing protection on the financial guarantor (or its holding company) itself, Fitch said people should also consider the nuances of ISDA language, particularly in terms of settlement and succession, should these monolines be split apart.

Fitch Ratings downgraded four classes of notes issued by Coltrane CLO. All classes are on rating watch negative by the rating agency. Fitch lowered the transaction's €26,000,000 class B notes to 'CC' from 'CCC', €45,000,000 class C notes to 'CC' from 'CCC', €1,750,000 class D-1 notes to 'CC' from 'CCC' and €2,000,000 class D-2 notes to 'CC' from 'CCC'. On Feb. 25, the rating agency was informed that this CLO had experienced an event of default attributed to a threshold value event that was uncured for five business days. Fitch has not received confirmation that the controlling class or the trustee intend to liquidate the underlying loan collateral in the near term. If they actually chose to liquidate the underlying loan collateral, another rating action might be taken, Fitch said in a release. This market value CLO, which is backed by leveraged loans, was Deerfield Capital Management's first foray into the European CLO market. The €300 million CLO was priced in October 2006 via Banc of America Securities (ASR, 10/26/06).

MBIA has announced that it will stop guaranteeing ABS for six months and said that it intends to split the structured business from its municipal bond division within a five-year period. According to published reports, Joseph Brown, MBIA's new chief executive, said in a note to shareholders that this move is being made while the company evaluates its options. Meanwhile, Moody's Investors Service today confirmed MBIA's and its affiliates' 'Aaa' insurance financial strength ratings. The rating agency has also confirmed the 'Aa2' rating on surplus notes issued by MBIA Insurance Corp., and the 'Aa3' senior unsecured ratings of its parent company, MBIA Inc. The rating actions reflect Moody's assessment of MBIA's current efforts to strengthen its capital position in terms of its problematic mortgage and mortgage-related CDO exposures. The rating firm also considered the changes the company is implementing to limit the volatility associated with its insured portfolio. MBIA's current outlook is negative.