PHOENIX - New CDO products are expected to grow rapidly in 2002, outpacing the traditional assets backing the instruments, according to Chris Ricciardi, managing director at Credit Suisse First Boston, who spoke at the "New CDO Products" panel at the IMN/Fabozzi ABS West conference.
In addition to ABS and hedge-fund CDOs, which the market has some familiarity with, Ricciardi said to look for deals to emerge backed by trust-preferred shares (TRUPs) issued by small to mid-sized regional banks. He also mentioned the expected growth of managed synthetics backed by a dynamic pool of credit risk products.
The rarest of the emerging assets are definitely the TRUPs backed by hybrid securities, which are issued by local banking entities with no access to the debt capital markets, Ricciardi said. In this class, a geographically diverse pool of banks sells these hybrid securities to the asset manager, who in turn structures the transaction.
The challenge in structuring TRUPs lies in the fact that since these banking entities do not have debt outstanding, they are unrated. This represents a problem for all involved, as the collateral in the deal has no reference point at which to structure subordination levels.
To combat this, there are three criteria for all banks in the pool: all must have at least $200 million of assets; all must have been profitable for at least the last five years; and 10% of capital must be tier-one eligible.
When structured, the triple-A-rated paper looks and behaves like a similarly rated corporate bond. Down in credit, the triple-B tranche looks more like a leveraged-loan transaction.
The advantages of this for the issuers, Ricciardi added, are the tier-one capital eligibility, the fact that for accounting purposes these count as debt on books and the inherently long-dated (30-year on average) maturity of the underlying collateral.
An added twist is that since this is debt on books, the issuance of the trust-preferred shares does not dilute the ownership interest of the bank.
Managed synthetics which are not as new, but rapidly growing - offer asset managers the ability to get funding while transferring credit risk. They also offer buyers a managed - rather than static - pool of assets.
In terms of the number of deals placed in the fourth quarter of 2001, the popularity of the managed portfolio with investors has led to the asset class overtaking the standard collateral - high-yield and investment-grade corporate debt.
Sheldon Sussman, head of global credit products for Rabobank International, said that managed synthetics outpaced debt-backed CDOs by almost a two-to-one ratio in the last three months of last year.
But Sussman pointed out that the highly leveraged nature of these transactions lead to their increased sensitivity to ratings downgrades, something on everyone's minds here in Phoenix.
