A number of market sources are predicting a Darwinian fate for CDO managers similar to that playing out among subprime mortgage lenders, as the credit cycle turns and funding can no longer be counted on. And while those established in the CDO sector have been eagerly awaiting spread tiering and greater availability of collateral, it's interesting to note that even among the Wall Street insiders, no one seems to have a firm grasp on just how many active CDO managers there are today.
The rating agencies also have admitted that they have difficulty staying on top of them. Reuters quoted Vincent Matsui, a senior director in Fitch Ratings' asset manager ratings group last Wednesday saying the rating agency has a backlog of 60 new managers that need a profile and a rating. Fitch currently has profiles for 66. About a third of those dabble in subprime securities, Reuters reported. Standard and Poor's has 83 profiles available.
Those 83 profiles would come close to fulfilling the amount of CDO managers gracing the market more than seven years ago, according to Morgan Stanley. In 1999, there were a few more than 100 CDO managers across the U.S. and Europe, according to the investment bank's data. That number ballooned to roughly 550 total managers in 2005 and 636 total managers by the end of 2006, Morgan Stanley stated. And by the end of last year, the number of unique managers (presumably those with separate corporate parents) with at least one CDO under their belt had grown to 343 in the U.S. and 112 in Europe.
And there are still new ABS CDO managers coming to market. Some, such as Terminus Asset Management Co., have recently open up shop as start-ups by former employees of a corporate parent (in this case SunTrust Robinson Humphrey). While others, such as subprime lender Novastar Financial Corp. and Countrywide Financial Corp., are seeking diversified financing and fee-based revenue to augment their mortgage origination businesses. Novastar brought its first CDO to the market last month, and the lender has stated plans to do more. That's despite the fact that the $347 million static mezzanine deal backed by subprime collateral ended up costing the lender $4 million in trading losses while it was ramping up, according to the company's fourth quarter earnings report.
Standard and Poor's said that 34 first-time CDO managers entered the market between October 2005 and June 30 - double the number of first-time managers reported in S&P's last study as of 3Q05, and amounting to 14% of all new-issue cash flow CDOs rated by the agency. However, while only 17 first-time CDO asset managers entered the market from January 2005 through Sept. 30, 2005, the new players also managed 14% of the new-issue cash flow CDOs during the time period. Fortis Investment Management led the newcomers, with three ABS CDOs totaling $2.38 billion. Seneca Capital Management had managed the second largest amount of liabilities, with a $1.6 billion ABS CDO. NIR Capital Management was close behind, with an ABS CDO totaling $1.5 billion.
(c) 2007 Asset Securitization Report and SourceMedia, Inc. All Rights Reserved.