For several years now, investors have asked their bankers for increased transparency in CDOs, and recently several firms have taken strides to provide more portfolio-specific information to investors outside of the deals. But what's in the front seat driving this trend? And are these real strides or marketing ploys?
Competing for market share, trustees such as Wells Fargo and JPMorgan Chase have touted their deal reporting. A few years back, Wells began marketing its investor Web site. All three rating agencies have made significant headway in their individual surveillance products and indices.
But underwriters, it seemed, were more reluctant to cough it up. According to sources, the desire to participate in an aftermarket has really brought deal managers on board.
Citigroup/Salomon Smith Barney (SSB) announced this month it would begin funneling its CDO information to Intex, a third-party analytics provider. Goldman Sachs and Morgan Stanley made similar moves earlier this year. By some accounts it appears that Wall Street is making an effort to appease investors' demands for more transparency.
"This is the next logical step in the growth of the market. It's a healthy recognition on the part of dealers that in order to make the market grow, particularly the secondary market, more information and analytics are needed," said Glen McDermott, head of managed CDO research at SSB.
The decision by SSB to release information on upwards of 47 collateralized debt obligations solidified transparency as one of the year's top trend. In fact, just last month the Bond Market Association gave its nod to the market by setting up a committee dedicated to CDOs. But considering that investors have clamored - albeit largely from the sidelines - for greater transparency since CDOs hit the mainstream in 1996, the question arises as to why now? Have concerns about corporate malfeasance significantly trickled into this sphere of fixed income?
"This, in my opinion, is a natural feature of a maturing market," said Jim Wilner, vice president at Intex.
"It's really incorrect to compare the problems in the CDO market with what happened to Worldcom or Enron," said Douglas Lucas, director, CDO strategy at UBS Warburg. A veil of secrecy, to the extent the media loves to spin the phrase, has not been an issue for CDO market players.
Lucas noted that CDO information had always been available. "When you own a CDO, for example, you really do get a terrific amount of monthly information from the trustee," he said.
But while CDO noteholders were given reports to shift through, an outside investor looking for information would come up short.
"Early on, what stopped a general flow of information was, at least on the part of portfolio managers, an unwillingness to share with others not invested the deal," said one source.
But at the end of the day, everyone, dealers and investors alike, were left asking "What about the people who don't own the CDO, but to whom you may want to sell a secondary position?" said Lucas. And as CDOs are a complicated asset class, the more information that is made available, the easier it is to understand a transaction, he added.
These, probably more than any other factors, have helped drive the point of transparency home to CDO dealers.
Alongside the ramp-up of third-party information providers - such as Intex or a Wall Street Analytics - came the increased flow of CDO-related information from ratings agencies over the last few years. The culmination of third-party material helped to soften dealers' attitude toward releasing deal-specific information.
"Two and a half years ago the only CDO information was a monthly trustee report...and that was a performance metric only; it was very static," said one sellside source. "It wasn't anything really dynamic and it wasn't enough information to do models."
Now, with multitudes of CDO portfolios under stress and roughly $350 billion outstanding in CDOs, the market has grown so large that investors are demanding more transparency.
"To grow the secondary market, we decided to share information. That's the way the industry is going," said McDermott.
It's important to note, however, that the market was not exactly shrouded in secrecy, even for investors not associated with a specific CDO. In recent years interested buyers could turn to reports issued by ratings agencies. Also, it is a misconception that the new Intex arrangements with Goldman, Morgan and Salomon are in fact, "new". As recently as two years ago Intex began offering its clients CDO modeling; Intex had over 500 CDO models, from numerous investment banks, before it had even inked its new agreement with SSB, said Wilner.
What is new is the way the information is now obtained. Whereas in the past Intex had to request permission from, typically, the lead underwriter for information, which took some time, the new arrangements ease those restrictions, Wilner explained. This increases the availability of information and, perhaps more importantly, the speed of gathering that information.
While working through channels for information was cumbersome, this was a feature not unique to CDOs; the CMBS market several years ago had similar restrictions.