Speakers on the opening panel at Information Management Network's second annual European CLOs, Structured Credit Products, and Credit Derivatives Summit said that the medium- to long-term outlook for the securitization market is positive, although it will be a bumpy ride along the way.
Despite mark-to-market volatility still being a main concern, there are well over 100 investors still active in the market. The panelists said they are hopeful about seeing that number grow to 200 to 400 investors.
Simon Perry, managing director at UBS, seemed less optimistic. He said that the fundamental basis of how the market looks at CDOs has changed and the universe of investors is forever reduced. Much of the triple-A paper went into a variety of structures and relied on borrowing in short-term market and investing in long term market - this, he said, was clearly a strategy that the market wouldn't see again.
But it's not necessarily a dismal picture. Perry and other panelists said that there is still some demand for investments in underlying asset classes of CLOs from investors who need to put capital to work. For example, Shaun Baddeley, executive director at Santander Global Banking & Markets, said that for non-mark-to-market investors who have expertise in a certain underlying asset class, there is some interest to get exposure to it in a slightly more levered way. "There are tentative signs, but it's not very clear at this stage," he said.
Perry added that there has been an increase in activity in the secondary market because people are prepared to sell at levels that the markets have reached, and this coincides with levels at which people are prepared to buy. It's a situation where people find themselves forced to sell at the current distressed levels in order to get some liquidity.
The story is much different on the primary front. The disappearance of the triple-A buyer means less optimism for a revival of primary market flow. "You need the triple-A buyer and we just don't see where they will come from," a panelist said. Until the triple-A dynamics change, there can be no price transparency as far as where levels should be.
As far as consolidation among CLO managers in the industry, panelists said that it will really be driven by investor sentiment. As the investor base shifts, they will look at placing money with managers that have well-resourced teams and the security that those teams will remain for the long term. Bigger mangers will continue to grow while the smaller managers will run their existing CLO business, although they will find it increasingly difficult to grow their assets under management.
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