Not surprisingly, the rapid development of a secondary market for CDOs is still a hot issue, as expressed by the several hundred in attendance at a presentation at last week's Global Credit Conference, hosted by Bear Stearns in New York.
According to speaker Adam Siegel, a managing director at Bear, the firm traded $9 billion in secondary CDO paper during 2003, compared with about $400 million in 2002.
So far in 2004, Bear has traded about $2.5 billion. Apparently, even CDO equity has moved through the secondary market, though to a much lesser extent.
"A year ago, you would have left this conference with a distressed triple-A in a doggy bag," Siegel said.
Reportedly, the bid for distressed CDOs from hedge funds is almost unsustainable. One trader unaffiliated with Bear Stearns said, "We can't find enough of it for them."
Well timed for Siegel's discussion, last week a 25% chunk of the CIBC World Markets' $1.5 billion portfolio of CDOs (previously in the firms SPARC ABCP conduit) was making the rounds, IFR Markets reported on Wednesday. According to IFR, RBS Greenwich won the bid for the portfolio. What wasn't sold into the market was placed in Royal Bank of Scotland's Thames Asset Global Securitization (TAGS).
In new developments, European investors have recently become sellers of secondary CDO paper, source said. Traditionally, European investors are buy-and-hold, even for distressed CDOs.
"U.S. investors think there's some value in euro-denominated paper, because they can pick it up at a discount," said Johnny Srivastava, a secondary CDO trader at Fieldstone Capital, which placed $40 million in euro notes with an investor two weeks ago. "There's less investors who can buy euro paper, and most of it is synthetic."
"The fact that even equity is trading now shows that people are going all the way down the capital structure," another trader commented. "The market is more liquid and seems to improve all the time."
Abbey's gift to CDOs
As others have expressed over the past year, much of this growth in the secondary is attributable to Abbey National's $7 billion CDO portfolio liquidation that began last spring, Bear's Siegel explained. Abbey had hired Pacific Investment Management Co. (PIMCO) to oversee the sale. PIMCO then introduced the bid list-style auction to the CDO market, something that hadn't been done in previous years.
The Abbey liquidation introduced other previously unseen factors into the market, such as large, hundred million dollar block sizes and improved analytics, which has proven to be a boon for analytics software provider Intex Solutions.
Basically, if dealers wanted a piece of Abbey action, they needed systems in place to value and bid on a specified list of CDO bonds in two-weeks' time.
Alongside the Abbey-inspired developments, dealers, trustees, rating agencies and investors were already making strides in transparency. Interestingly, Abbey's massive liquidation has significantly tightened secondary spreads, bringing them in line with new- issue CDOs.
This has helped the new-issue market as well, as CDOs now retain market value. Dealers are able to put a price on a transaction they did not necessarily underwrite. "You don't buy a new issue and find it falls in value the next week," Bear's Siegel said.
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