NEW YORK - As many as 500 people attended last week's 2001: A CDO Event, Investment Management Network's fourth annual New York conference devoted solely to the collateralized debt obligation market.
Despite recent downgrades in the market - which, it was decided, have been largely tied to the 1998 CDO vintage - the tone at the conference was unmistakably positive.
"There will be challenges, but there will be tremendous opportunities," said David Tesher, a managing director at Standard & Poor's and co-chairman of the event, during an overview session.
If conference attendance reflects a market's growth, then others agree with Tesher's sentiments. According to conference director Cheryl Fallick, there were approximately 365 people at last year's New York CDO event, which she said "was considered huge at the time."
Last September, the European counterpart to the New York CDO event, which was held in Germany, attracted nearly 450 attendees, so the conference seems to grow by 50 people every six months, Fallick noted.
"The reason I think it's so successful is that we have good support from the industry, and it's not the same event every year," she said. "It really evolves as the asset class evolves. And of course it will continue to do so."
Collateral managers
Throughout the sessions, the following trends surfaced: 1) increased issuance of deals backed by non-structured, investment-grade debt; 2) longer lead time in closing deals; 3) an exploding European arbitrage market; 4) the evolution of deal reporting from the trustee and collateral manager; and 5) continued challenges in placing equity.
However, the theme that dominated was collateral-manager quality and its impact on a deal's performance. Because investors are increasingly wary of this, the market continues to show sings of tiering (see ASR 2/7/01, p. 1).
According to Gus Harris of Moody's Investors Service, 10 out of the 18 deals Moody's had rated through the first week of March were from repeat issuers, where the collateral manager has shown a track record.
While factors such as deal vintage, structure, and collateral type definitely impact the performance of a deal, none are as important as the collateral manager, stated Sonia Hamstra, senior vice president in structured securities at American General Investment Management.
"I can't stress it enough," Hamstra said. "Manager, manager, manager."
Managers can differ in many ways. For example, some have different definitions of defaulted assets, and some choose to trade out defaults at different times.
"We tend to be more patient with managers who are more conservative in identifying defaults," S&P's Tesher commented.
Not surprisingly, managing to the equity versus managing to the debt was a large part of the tiering conversations. One panelist said that those collateral managers who have managed for front-loaded returns are not likely to be back in the market, as their deals fall apart.
"A manager who is servicing the note holders is also servicing the equity holders," that speaker said, stressing that a well managed deal does not always show the best current income, but rather markets a back-ended return. "Managers who are labeled equity friendly may have a difficult time returning to market."
However, it's a difficult market for managers, with the limited universe of equity investors. Because of the tiering, some suggested that first-time CDO issuers might choose to have their deals insured.
This is especially true in the European market, where the arbitrage CDO culture is just now blooming, said Eileen Murphy, a co-chairwoman of the conference.
"Smaller shops will benefit from something like monoline insurance," she said. "And then once you develop a track record, you can have the training wheels taken off."
The European boom
While the European arbitrage market is taking off, it will evolve differently than the U.S. market, according to panelists on a session focusing on the European high-yield market.
To start, the deals are likely to be multi-asset type, with higher concentrations of loans than bonds, baskets for U.S. high-yield, and investment-grade credits (see ASR 2/26/01, p. 8).
"Don't forget that five years ago, there wasn't a European high-yield market," Edward Van Wijk, a senior vice president at Robeco Group, commented. "You're going to see the development of a different species of CDOs in Europe."
From a structural standpoint, regional diversity will be a key difference, and the deals will tend to be larger. The issuers will tend to be well financed institutional platforms who are willing to take franchise risk, naming their deals after the firms (unlike what is often seen in the U.S.).
As with the U.S. market, managers who offer greater transparency will be favored by the market. Also, a longer ramp-up period is anticipated for Euro deals.
According to the panelists, roughly 50% of the European CDO pipeline is made up by arbitrage deals.
Earlier this month, Euro Capital Structures launched the first-ever all leveraged loan deal out of Europe, backed 100% by European leveraged loans. The EUR500 million deal is called Harbourmaster CLO 1, and rated only by Fitch.
