The second annual CDO Conference sponsored by The Bond Market Association served as the unofficial kickoff to conference season for the securitization markets. The day's platform documented growth in product types - namely trust preferred, synthetic, and ABS CDOs - and hashed out issues from CDO equity risk to structured models of credit risk.
Several speakers heralded the benefits of CLO product, an asset class that, due to increased demand by investors, has become as hard to find as a positive presidential campaign ad.
"The CLO product has fairly steady performance in terms of amount issued each year, investor interest, and performance of deals," during credit cycles, said Chris Ricciardi, managing director and global head of structured credit products at Merrill Lynch. Ricciardi estimated CDO market issuance to date at $100 billion, including risk transference synthetic products.
"Broadly, CDOs are fairly similar to asset backed [securities]...and CLOs would compare favorably to credit card [ABS]," said Gary Witt, managing director at Moody's Investors Service.
"What's of interest to me is the focus on the liability side as opposed to assets. Liability is locked in - it makes more sense to look at liabilities because you have to live with [it] for the life of the deal," said Ji-mei Ma, director at UBS, noting the net spread from a deal is not absolute spread coming into the deal. "Ideally you want to participate in the structure where liability markets are tight and assets unwind," added Ma. Noting that rating agency studies found average CLO downgrade risk to be more favorable than for similarly rated corporates.
But tight spreads were the topic du jour, with nearly every dealer and investor feeling the pinch created by a supply/demand imbalance. Subsequently, CDOs are sourcing new collateral types to ramp up transactions including second-lien loans and money-market tranches.
"You have to ask [yourself] if the manager has experience in these assets. They do differ from traditional syndicated loans," said John Schiavetta, managing director at Fitch Ratings.
Standard & Poor's managing director David Tesher discussed resurgence of predominantly corporate backed market value structures, but with some structural features present. "A new generation is coming... some new structural features include the ability to have callable equity," Tesher said. Interest is generated from an eligible asset perspective the ability for a manager on a defined and limited basis to invest in corporate credit default swaps from both long and short position perspectives, he explained.
"Synthetic vehicles help dealers achieve a lower cost of funding, a big benefit given the tight spread environment, explained Fred Matera co-head of structured credit markets at RBS Greenwich Capital. These deals give investors exposure to highly rated assets but at a low cost of funds because "the assets stay on banks' balance sheets...and super senior protection is typically purchased by the funding bank," he said. "Going forward there is a wave of future in this market," Matera said of CDOs and credit default swaps.
Finally, liquidity is finally churning along in the secondary market, credited to increased transparency efforts pushed along by TBMA, but dealers still need to do more in this area if they want to grow the CDO market to its full potential, added Merrill's Ricciardi.
"Participation has been spotty - everyone has to participate in this program," said Ricciardi of the CDO Library. A creation of TBMA, dealers agreed to file deal documentation on this system. However, between June 30 and Sept. 8, just 53 of 135 CDOs that were issued had deal documentation available. "If you're an investor in the audience your job is not to buy [them]," Riccardi said. "Transparency and liquidity only happen if you have a cooperative effort."
Copyright 2004 Thomson Media Inc. All Rights Reserved.