LAS VEGAS - Additional CDO volume is expected this year compared with 2005, according to attendees at the ASF 2006 conference held here last week.
About $155 billion of CDO issuance came to the market in 2005, according to United Capital Markets Inc. Largely because of innovations in the credit default swap market, many are anticipating a barrage of issuance this year.
Srinivas Namagiri, a vice president at Deutsche Bank AG, said he's seen more CDOs come to the market this quarter than in any other first quarter he has seen. Namagiri attributes the increase to the surge of ABS synthetics and to new CDO structures, such as static pool deals. Any setback in home equity ABS issuance should be compensated for by synthetics.
But as more deals are expected in the market, so are new CDO managers. An increasing number of hedge fund managers, for example, could be inclined to enter the space because of their familiarity with the CDS market. Investors and issuers are hoping the market will be able to recognize the good from the bad.
Adam Siegel, a managing director at Bear Stearns & Co., said CDOs have become so mainstream they have essentially become another form of asset management. His advice to new investors in the space: "The most important thing in any CDO is that it is a levered bet on the underlying credit. The cracks to watch for are the nuances going into the deal, and does your manager understand the structure."
Many established CDO managers are irritated by a lack of sufficient price tiering among issuers.
"We hear it from investors and asset managers alike about the lack of distinction," said Mia Koo, a senior director at Fitch Ratings.
Additional price distinction
CDO managers are anticipating more price distinction among themselves this year.
"It is a seemingly low [barrier] of entry for CDO managers," said Pat Maley, director of ABS at Deerfield Capital Management. "But what I tell my customers is that the managers will be differentiated when the market isn't so good."
According to Maley, there is very little price distinction between tier one, tier two and tier three issuers at even the triple-B level.
Laura Schwartz, a managing director at ACA Capital Management, said she also is upset by all of the new entrants to the CDO market while there is little differentiation in both required credit enhancement levels and pricing.
"We know how long it took us to get these deals together [when we first started managing CDOs]," Schwartz said. "It is worrying to see how new entrants come in and do one right away."
Along with all the new entrants in the quickly growing CDO sector, conference panelists said turnover was nearly inevitable and ensuring that no one person was too important to lose was essential.
"It's important not to let everything rely on one person in the shop," Schwartz said.
Maley's company is hoping a variety of available investment opportunities and the chance for advancement will help retain employees.
"Personnel changes at the drop of a hat in this business," Maley said.
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