Paradise Island, Bahamas - Throughout several sessions devoted to collateralized debt obligations at the Information Management Network's ABS East conference in the Bahamas last week, the availability of collateral for CDOs of ABS and its impact on the market for subordinate bonds emerged as a major theme and/or concern.
Currently, there are at least five ABS CDOs in a ramp-up period, according to Steven Thompson, a managing director in the structured finance group at Prudential Investments.
"The triple-B subsector is very well bid right now, but I'm not sure it's going to be so well bid in January," Thompson said, during a session entitled The Cutting Edge of Asset-Backed Securities - Trends, Opportunities and Pitfalls.
One industry source said that sub bonds in the triple-B to single-A range could be trading as many as 25 points inside of where they would minus the CDO bid.
While most market players considered the demand and the tightening a positive impact of CDOs, some are concerned about the possibility of hasty ramp-ups by fund managers, where they're all chasing the same bonds.
"An impatient ramp-up is usually a bad one," said Eileen Murphy, managing director and global head of the CDO group at Chase Securities.
One development has been an increased use of synthetic exposures in the CDOs, allowing innovative managers artificially extended ramp-up periods - whereby, through credit derivatives, the managers can name assets and put them in later.
"As it becomes more difficult to source assets, bankers are being forced to be more creative, and synthetics are being used to solve ramp-up and maturity challenges," Murphy said.
Another development of the CDOs backed by ABS is that the fund managers have been purchasing less on-the-run collateral, such as 12B-1 fee bonds and intellectual property assets, according to sources.
"We're always concerned about how deep the demand is for double-B pieces when we come to market," said Julia Landes, a managing diretor at Heller Financial, during a session on the equipment leasing sector. Landes added that CDOs of ABS will hopefully have a positive impact on the market for equipment subordinate bonds.
Meanwhile, in addition to the CDO bid, Erisa developments - where certain investors previously excluded from the sub market will be allowed to purchase further down the credit spectrum - will add to the growing investor base for subs, potentially moving spreads in even further (see ASR 10/2/00), and making the marketplace for CDOs of ABS more competitive.