The role of the CDO manager has been called into question lately as market participants have suggested that investors are bound to favor static deals.
But the emphasis was back on the manager at the Information Management Network's U.S. CDOs, Credit Derivatives and Structured Credit Products conference in New York last week. As one panelist suggested, "A good CDO manager is worth his or her weight in gold."
Part of the problem behind market losses is that managers have been more reactive than defensive, which might have caused more equity losses, said panelist Mary Katherine DuBose, managing director at Wachovia Securities. Trading flexibility could offset defaults, she said.
CDO managers might also be able to trade out of assets for better credits or add swaps, other panelists said.
This is particularly true for the broadly syndicated CLO sector, where managers have flexibility in the deal and can trade in and out, preventing certain triggers, DuBose said. These transactions traditionally comprise higher-rated credits, as opposed to middle market deals that have more triple-C rated loans in their portfolios because of the nature of the assets, she said.
On the structured finance side, CDO managers are also able to liquidate and manage bid lists to find buyers for the interest-only cash flow, panelists agreed.
But restoring confidence in the managers is not a small feat given investor wariness over the asset class. However, managers might also be able to woo investors back by aligning their interests more closely with the investor community. This includes back-end fees so that manager compensation is much more tailored to performance, panelists said.
Investors are also waiting to see what the future holds for a widely expected but yet unseen manager consolidation within the industry.
"The market has been talking about CDO manager consolidation, but not much has happened in the way of actual consolidations," said panelist Chris Taggert, senior loan strategist at CreditSights. This may be because the larger managers have not liked what is in the smaller managers' portfolio. It could also be that these firms have asked to transfer their salaries and staff as part of the transaction, he said.
But there is definitely a market for consolidation, panelist Steve Odesser, managing director at Sheridan Capital, said. "I know several larger managers that are looking to buy smaller managers, if anyone in the audience knows any that are for sale."
Ultimately, a manager's survival will come down to those who have enough capital to ride out their existing deals, though credit analysis is important.
There are too many people and too few credit managers, said Janet Tavakoli, president of Tavakoli Structured Finance. She added that managers need to understand fundamental credit and not rating agency models. "These guys will have a chair when the music stops."
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