PHOENIX - Delegates lined the walls for a standing room only session dedicated to CDOs, credit derivatives and synthetics at Information Management Network ABS West 2005 conference held here last week.
The conference has been rife with talk of the unrelenting CDO bid, and how that demand has become manifest in the shape of new issuers. "I'm competing with a crowd of novices with piles of money from warehouses," said Frederick Horton, managing director of Trust Company of the West. "There are only four or five credible CDO issuers out there in each sector."
Mark Adams, senior vice president at Dominion Bond Rating Service, noted the abundance of CDO managers with only three or four years of experience in the business, and said that this can pose a problem on transactions with a longer maturity. "You are taking the risk of what their behavior will be in the future, and you just can't tell," Adams said.
While strong demand and record tights have led to a lack of tiering in the CDO space, market observers expect to see spreads widen on offerings from the less experienced managers if and when a credit event hits the market. Many agree that the question is not if, but when, the next hiccup in the credit market will occur. "I think we will see some kind of credit event in late 2006," said one source at a CDO issuer.
During the session, the question of whether or not a manager was even necessary on a synthetic transaction arose. TCW's Horton vigorously defended his job. "What is the alternative? Who chooses the assets? You can't just take whatever somebody else wants to short to you," Horton said.
One panelist said that the simple fact that investors were willing to pay the managers' fees made them necessary. Christopher Ricciardi, managing director at Merrill Lynch and the pre-eminent CDO authority, maintained that the manager plays a critical role as fiduciary and said that it would be "dangerous" to eliminate them. "One of the reasons there are not a lot of managers in investment-grade corporates is because investors have a lot of opinions [on those assets]. Those opinions are less clear for these assets," Ricciardi added.
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