The Information Management Network's 12th annual U.S. CDOs, Credit Derivatives and Structured Credit Products conference in New York opened last Tuesday with panelists speaking bluntly about current CDO market conditions. They also made forecasts about future deal structures.
"Let me summarize [the CDO market] for you: It sucks," said panelist Anatoly Burman, senior managing director at Aladdin Capital Management.
Perhaps the biggest emphasis in the opening panels was placed on the idea of "real" diversification in future CDO portfolios, according to Mark Adelson, a consultant with Adelson & Jacob Consulting.
Before the recent market turmoil, there was the illusion of diversity in ABS CDO deals, which, despite being heavily invested in RMBS, were separated out into different classes by region and borrower, said Stephan Kuppenheimer, chief executive officer at FSI Capital. "[The market] ignored the possibility that macro events could affect one entire industry."
Others agreed, commending the market's recent attempt to focus on the significance of a bigger economic picture, including the rating agencies that have begun to incorporate the potential effects of an economic downturn into their structured finance ratings. "The glimmer of hope here is that the market is realizing that macro issues are important," said Mahesh Kotecha, president of Structured Credit International Corp.
As a result of industrywide complications such as those seen in the mortgage market, future ABS CDO transactions will have a larger variety of asset classes in their portfolios, including auto leases and more esoteric deals, an attendee said in a separate interview with ASR.
The deals that have come to market recently have also had shorter investment periods and call dates, panelists agreed. As a result, managers will have to be willing to make money on the rotation of deals rather than on the duration of the deal life, said Brian McManus, managing director and head of the CDO research group at Wachovia Securities.
CDO transactions that are currently seeing interest outside of plain vanilla CLOs are TruPS, insurance-backed CDOs and SME CDOs, said Roger Merritt, managing director at Fitch Ratings.
A bit surprisingly, CDPCs and MV CLOs, despite recent restructurings, are also seeing steady interest, said Yvonne Fu, managing director at Moody's Investors Service. Notably, DBRS and Standard & Poor's declined to speak on the rating- agency-focused panel.
There will also be a continued interest in synthetics, which are shorter, more liquid and generally static, said Kedran Garrison Panageas, vice president in CDO research at JPMorgan Securities.
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