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CDO equity funds step up the pressure

Las Vegas - The growing clout of CDO equity funds is leading to so-called activist equity investors, according to market participants at ASF 2007 held here. Investors are asking for lower management fees, or, in some cases, no management fees, as well as higher return guarantees. One CDO recently marketed skipped subordinate management fees altogether, and an increasing number of deals are being structured without interest coverage and overcollateralization triggers.

"These equity funds are becoming a very influential group," said Keith Ashton, a portfolio manager with TIAA-CREF. According to one CDO manager, "You have seen equity investors with a lot of power over the last couple years." As the demand for high yielding CDO equity, and the expertise to pick the right managers, continues to grow, more CDO equity funds are expected in the market. "I think the market for these funds has really increased over the years," said Richard Schetman, a partner at Cadwalader, Wickersham & Taft.

Larger CDO equity funds are expected to begin issuing CDOs backed by equity tranches as a source of match term financing, according to several sources. Fitch Ratings is working on several proposals that basically repackage the equity tranches into a CDO structure, similar to a CDO squared, and Standard and Poor's is also rumored to be working on them. (ASR, 01/15/07)

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