After a 12-hour day spent funneling through pricing data, monitoring underlying collateral and butting heads with harried investors, a collection of CDO underwriters gathered in a conference room overlooking Madison Avenue in New York.
But this was no road show, nor a dinner-and-drink deal-close celebration. Moreover, no one in attendance was actually getting paid to be there.
As the securitization market expands in leaps and bounds and firms migrate to Midtown Manhattan office space, a new image of today's Wall Street begins to emerge. Sure things are tight all around, but are investors to believe in tall tales of bankers appearing at unpaid gigs?
The answer, according to the Bond Market Association, an organization of broker/dealers, is as simple as "yes."
CDO underwriters answered the Bond Market's call last year to form a new committee dedicated to collateralized debt obligations, one of the most publicly scrutinized areas of structured finance. Criticism against these debt instruments, which occupy a significant role in the capital markets universe, was not to be taken lightly. According to Moody's Investor Service, the overall U.S. volume of CDO deals it rated in 2002 reached approximately $65 billion, compared with $57 billion in 2001. However, CDOs currently hold the title as the loss leaders in structured finance ratings actions. According to Barclays Capital, the total number of downgrades that occurred in the first half of 2002 represents 61% of all CDO downgrades ever.
"The poor performance of the credit markets over the last couple years has resulted in poor CDO performance," said Eric Bothwell, managing director responsible for Goldman Sachs' U.S- managed CDO business. "This has caused many investors to rethink the terms of their continued participation in this market."
Certainly the dozen or so members serving on this newly minted committee have much to wrap their heads around. Though the debt instrument has expanded rapidly since the mid-1990s, there yet to be a public guide for investing in this multi-billion dollar market space.
The formation of the CDO committee, which includes Bothwell, signifies things are poised for change.
"The simple goal for the committee in its first year, and going forward, should be to strengthen and improve the CDO market," said Bothwell. "An immediate part of that will be to take steps to restore investor confidence in the CDO market," he said.
Late is better than never
It appears the Bond Market's initiative may be the first time a spokesperson, of sorts, has been created solely for the collateralized debt obligation market. Considering the plethora of issues that have sprung up over the last two years - such as residual write-downs, equity losses and manager gaming - now seems the perfect time for a forum to emerge.
Unpaid service on the CDO committee, "is something you make time for," said Jerry DeVito, a managing director at Credit Suisse First Boston. "It's certainly important for the underwriting community to collect and try to address the concerns and issues raised by investors. There isn't any real place where underwriters can talk about issues in the market, so the Bond Market's committee provides a convenient forum," he said.
Currently serving as the committee's co-chair, DeVito joins with Janice Warne, a managing director at Salomon Smith Barney, and Christopher Ricciardi, formerly of CSFB, now part of Merrill Lynch's CDO team, in heading up the new CDO committee.
A granddaddy of this market sector, DeVito believes CDOs are on clear path towards maturation and that the market, contrary to mainstream press headlines, is not caving in. By agreeing to serve on the CDO committee, he has the rare opportunity to develop proactive programs and initiatives alongside other leaders in the field, rather than competing against them.
"I'm very pleased with the level of participation - all of the participants have an interest in getting things done. We have already had several constructive meetings and developed a plan of initiatives to address transparency and other CDO specific items," DeVito said of the group, which initiated its first meeting last November. Since then, initiatives have congealed and subcommittees have formed. It appears the Bond Market's newest endeavor will try to be a lot of things to a lot of people.
Taking care of business
A forum for ideas and concerns, a central meeting space bringing together both titans and small shops, a tool for education, the ability to produce a unified voice to legislators... these were ideas expressed for the committee's design.
"It's critical for this business to have more liquidity for its products," said CDO committee member Ken Wormser. "Through a coordinated effort by various underwriters, we can help facilitate that process - we won't drive it but we can be facilitators, in the middle."
It is a shared goal by the members to drive liquidity in the secondary market, said Wormser - who recently landed a new gig as managing director in CDOs for CDC Ixis - which led him to volunteer his time. Comparing the maturation of CDOs to its MBS predecessor, Wormser said the committee envisions a market where modeling information is easily accessible, and where reporting styles by underwriters, issuers and trustees alike all utilize the same user-friendly format.
According to DeVito, a number of initiatives are on the table. After all, the CDO market has been around since the late 1980s, he said, with substantial growth since 1998. "And like other markets that have existed in the past, like MBS, as it matures we are finding out where we need to do work to further develop and improve the market."
Currently, the primary objective is pushing for CDO transparency, which can be achieved by getting investors information in a convenient, user-friendly format. The benefit is greater liquidity, which affects every member of the underwriting community, big and small, positively.
Overall, the Bond Market Association would like to act as a neutral clearinghouse for CDO information. Indenture documents for specific deals, for example, could one day be posted online via the association, although nothing to that degree has been announced. Legal hurdles currently present the most challenging aspect to putting plans into action. As a self-proclaimed ringleader for CDO transparency, the committee is the first to explore the legal territory surrounding CDO disclosure, as these vehicles are not publicly registered.
Underwriters will have to get comfortable with sharing deal information, for example.
"These are significant goals, dealing with the mechanics, the logistics of things," said Wormser. But considering the leaps technology has made since the MBS market was established, Wormser believes maturation and liquidity can happen at a faster pace than it did elsewhere.
According to Nadine Cancell, vice president and assistant general counsel for the Bond Market Association, some of the committee's work will soon see daylight. As the advisor for the CDO group, Cancell stated that an official publication of CDO definitions and explanations of valuation models should be available by mid-year. The research detailing various CDO structures, as well as their purposes, will also become available this year.
"There is a high level of sophistication with CDO investors. But information is needed not just by the investors, but numerous other groups affected by CDOs," Cancell explained. "Risk managers, credit managers, attorneys, operations individuals, even dealers who may not issue but would like to trade...the committee strongly believes in having education to offer all of them," she said.
To that degree, several educational steps have already been taken. The Bond Market Association hosted a CDO forum last month, which was co-sponsored by the Risk Managers Association. The event was oversubscribed, indicating the CDO committee has tuned into the right frequency. Expect to see other forums in the coming months, said Cancell - ones that delve into CDO-specific topics and others aimed at a broader audience.
"The committee's goals are broader than simply improving market transparency," said Bothwell. "That is one of the things we will focus on and work to improve, but we will be active in other aspects of improving the market," he said.
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