According to Standard & Poor's, approximately 50% of the synthetic investment grade (IG) CBOs in their hearty queue are backed by static pools, with managed IG synthetic deals making up the other half. "We're seeing a resurgence in the static pool IG CBO," notes Nik Khakee, S&P's synthetic CBO director. Helping this comeback are disclosed pools and bankers allowing investors to take a proactive role in adding and removing credits. For example, two months ago, a bank sponsored static pool IG CBO had WorldCom, Inc. in the portfolio initially shown to investors, which was later replaced without much opposition from the bankers.
With greater transparency since the first generation of static pool IG CBOs, investors see a lot of value in not paying a manager, thus saving on management and banking fees that are squeezed out of the notional amount of the deal, which some say weakens the transaction right out of the gate.
"Seeing managed IG CDOs bleeding in the secondary market with significant Railtrack and Enron positions doesn't show me a lot value in hiring someone to manage these vehicles," said one European investor.
Bankers concur that in order to add value, CDO managers must be willing to take losses early and be extremely proactive, as IG CDOs are highly leveraged. "With a 25-to-1, or 30-to-1 leverage ratio that these IG CDOs often have, it only takes a couple defaults to wipe out the equity support," said one banker.
"You have two types of mangers: the deer in the headlights-type and those who are proactive and are willing to take small losses to dump imploding credits, making up those losses in other places," the banker added. "Managers who are not willing to take losses, should not be allowed to run an IG CDO, because in today's environment, IG bonds do default."