The impending summer slowdown is nothing new for the CDO market, which has already seen a slow pace of issuance for almost a year now.
In an effort to counteract beleaguered volume and maintain cash flow, the market has refocused its efforts to monitoring portfolio risk. Increasingly, however, some managers are earning new fees by taking on the management responsibility of existing deals directly from their competitors.
Last week, Centerline Capital Group announced that it had taken over responsibilities as collateral manager for two commercial real estate CDOs (CRE CDOs) from Nomura Credit and Capital (see Whispers). This change is effective immediately, according to a Centerline spokeswoman. Centerline also currently serves as the primary and special servicer for both CDOs.
The two CDOs are made up of more than $1.6 billion in bridge and mezzanine loans and B-notes. Equity interests in the transactions, as well as the junk-rated securities, are owned by Centerline's Real Estate Special Situations Mortgage Fund, an investment fund that Centerline currently manages.
The decision to take on management responsibility for these transactions came from Centerline's desire to expand its asset management platform. The recurring asset management fees from these deals will be used to originate new commercial real estate loans for the CDOs using their low funding costs, Marc Schnitzer, president and chief executive officer at Centerline, said in a release. "When the conduit market stabilizes, Centerline will be positioned to build a strong commercial loan origination pipeline."
In addition to the management transfer, Centerline brought over a 14-person team from Nomura to manage the deals, including managing director Mark Brown, who will serve as senior managing director and head of CMBS and commercial products for Centerline's commercial real estate group. He will report to Schnitzer. Calls to Centerline for comment on the additional hires were not returned by press time.
New Fees, Old Deals
However, Centerline isn't the only asset manager looking to bulk up its portfolio and management fees.
London-based credit asset manager Cairn Financial Products is now the successor collateral manager for White Marlin CDO 2007-1, a $1.2 billion investment-grade corporate CDO. Sailfish Structured Investment Management, which is a wholly owned subsidiary of Sailfish Capital Partners, resigned as portfolio manager of White Marlin in April.
Last month, Babson Capital Management took over and restructured a $680 million CLO called Vinacasa (previously known as Beecher Loan Fund) and a market-value CLO managed by Hartford Investment Management. This was after the value of the collateral dropped below 90 cents on the dollar in February, according to reports.
The firm also took over management for Osprey CDO 2006-1 from Brightwater Capital Management, an alternative investment manager owned by German lender West LB.
Deutsche Asset Management replaced London-based Brevan Howard Asset Management on a CDO in April.
Staffing Down on Issuance
Part of the drive behind the managerial shuffling that is going on in the industry is from firms who are looking to take advantage of good buying opportunities from managers that are either downsizing or refocusing their business portfolios.
"It is becoming a bigger trend as management companies continue to downsize or staff exit the firm. Some [asset managers] no longer have enough personnel to oversee these deals appropriately," said a CDO manager.
Another CDO market source agreed, adding that the typical summer slowdown, combined with sluggish new issue growth, will make it very difficult for managers to ramp deals in the coming months.
The current U.S. CLO forward pipeline stands at an all-time low of $3.3 billion, according to data from JPMorgan Securities. Total 2008 CLO issuance to date was $13 billion at press time, 73% less than the $49 billion in issuance for the same period in 2007, JPMorgan said.
"If you are not constantly printing deals, you cannot feed the lions because everything, from the day it's printed, becomes a roll-off portfolio," said Brian Yelvington, senior macro strategist analyst at CreditSights. He noted that firms with small portfolios outstanding and with only several years until maturity could see staff exit because of the lack of prospective opportunity.
Some of the larger managers might also be suffering from staff departures as they face stagnant issuance, events of default or liquidations. Others have refocused the direction of their portfolio away from structured finance assets. For those firms that have other assets under management, structured finance assets may be tertiary to their overall objectives. "If you have other types of structures or assets that you are managing - for instance real money, hedge fund money or trading desk flows - structured products may detract from those efforts, and you may just decide to jettison from that," Yelvington said.
CDO managers also agreed that there is the possibility of getting an amendment to restructure several transactions into a single deal in order to strengthen the cash flows for note holders, though it has yet to be seen.
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