Despite numerous calls and anecdotal evidence over recent months to the contrary, CDO investors still do not appear to be asking for much consolation when they buy into a deal run by a first-time manager. The so-called seasoned CDO managers - those who have weathered at least one full credit cycle - have been irritated by the ability of new managers to swoop into the market and price a deal only a couple basis points, if at all, wider than their own. They say investors purchasing bonds from new managers without a discount will regret that decision when making money isn't so easy.
As David Basra, managing director and co-head of European securitization at Citigroup, put it bluntly earlier this year in a call for manager price tiering: "I'm sorry, but a monkey could have made money in the last four years."
New managers had a 37% hold on the U.S. high yield CLO market last year and accounted for 40% of mezzanine structured finance CDO volume, according to a JPMorgan Securities report released last week. The trend is even more dramatic within the European CLO market, where new managers constitute more than half - at 58% - of all deals so far this year. And while that tally of new managers to old does not look like much compared to say, 1998 - when 88% and 100% of managers in the U.S. CLO and U.S. mezzanine SF CDO sectors respectively were new - managers say today's availability of credit and complexity of structures creates a landscape more deserving of price differentiation.
In the first half of the year, U.S. CLOs issued by new managers, on average, priced at a discount of only 1/5 of a basis point at the triple-A level, and 18.5 basis points at the double-B level, JPMorgan found. U.S. mezzanine structured finance CDOs from new managers priced on average one basis point wider at the triple-A level and 11.7 basis points tighter at the triple-B level. JPMorgan acknowledged that too-little data contributed to a lack of a strong pattern for the mezz SF transactions, particularly at the lower end of the capital structure, but did conclude that investors do not appear overwhelmingly in favor of seasoned managers in the space. "It appears as though new managers have been able to place a large amount of debt at fairly minor, if any, spread give-ups," the analysts wrote.
But as the JPMorgan analysts pointed out, a manager-to-manager comparison of CDO pricing carries with it a number of challenges. Certain factors, such as tranche-specific details and investor fixed costs are likely to impact pricing, although JPMorgan removed obvious outliers. Additionally, clearing spread levels (dollar price data was not used) were benchmarked within the specific timeframe they were issued. Even then, the analysts said the comparison was still not exactly apples-to-apples. For example, the definition of when a CDO manager is a "first-time" manager could vary depending on whether that definition is blanketed across the investment vehicle itself - or simply the deal's predominant asset class. And, as a number of investors have pointed out, certain shops that appear new are actually staffed with seasoned managers.
Alas, all opposing managers say they will revel in distinction when credit performance begins to deteriorate.
Standard and Poor's for nearly two years has been tracking more than 100 portfolios in an effort to rank CDO managers based on performance. The rating agency piqued a fair amount of interest last July (ASR, 07/18/05) when it announced the creation of an ABS performance benchmark that could eventually be used to rate the performance of one CDO against another. S&P ranked 25 at the time, but citing a lack of comprehensive results, did not release specific names.
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