Chicago-based Asset Allocation & Management (AAM) announced that investor efforts to uproot it as collateral manager on three ABS CDOs have so far proved unsuccessful.

A number of investors had intended to replace AAM as manager of Diversified Asset Securitization Holdings II and III (DASH II and III). Earlier this year, investors voted to retain AAM as the collateral manager for DASH I. However, debt investors in DASH II and DASH III subsequently voted to reject AAM's replacement "key man" team, which, in the end, appears to have been overruled by the equity holders, the majority of which are either clients or affiliates of AAM.

"In a process that ended [Thursday], Meritus Asset Management's attempt to replace AAM as collateral manager for DASH II and III was rejected by investors," said AAM in a prepared release.

In the Spring, several collateral managers of the three DASH CDOs managed by AAM resigned, some of which went to work for the startup Meritus. Following their departure, a debt investor with large positions in all three DASH CDOs led a campaign to replace AAM as asset manager.

The debacle, which may end up in court, illustrates that investors need to be comfortable with both the day-to-day portfolio team as well as the sponsoring institution. Perhaps more significant, this also illustrates the challenges for debt investors to enforce covenants in CDOs.

Meanwhile, AAM is in the preliminary stages of planning for its fourth ABS CDO, a company spokesman said. DASH I, underwritten by the former fixed income group at Prudential Securities, was the first visible ABS CDO to come to market.

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