CDOs: Old hands face up the shock of the new

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By:
Kathryn Tully
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The rapid influx of new managers to the CDO market is a staffing headache for established players.

Existing CDO managers are struggling to retain key talent as new firms enter the market. Speaking at the American Securitization Forum conference in Las Vegas in February, Pat Maley, director of asset-backed securities at Deerfield Capital Management, said that this was one of his biggest challenges. “We constantly worry about losing our staff and, because of that, we are constantly on the lookout for new people,” he said.

The number of new managers, and the rapid increase in deal volume, is also making experienced managers frustrated that there is little distinction in pricing between deals done by new entrants and those done by firms with a proven track record. “Our hope is that down the road there will be more tiering. When collateral and CDO managers have been performing well, they should be rewarded when they come back to the market,” Ed O’Hara, senior portfolio manager at Vanderbilt Capital Advisors, told the conference.

The loss of talent at established CDO managers is also putting pressure on ratings. Kevin Kendra, senior director in credit products, who manages performance analytics at Fitch Ratings, says that the normal impact of a change of personnel is short lived. “From a practical stand point, what generally happens is that manager activity of CDO administration slows down during these transition phases, effectively making the deals static transactions on a temporary basis,” he says.

But sometimes the effect can be more serious and persistent. Fitch Ratings put Austria’s Uniqa Alternative Investments’ CAM3 CDO asset manager rating on ratings watch negative last November because of the departure of two managing directors, Marcus Klug and Manfred Exenberger, and the resignations of two more staff, who were expected to leave in February. Fitch said that a strong reliance on key staff at the CDO manager was the reason it had only a CAM3 rating in the first place. The ratings are on a scale of CAM1 to CAM5, with CAM1 being the highest rating.

Fitch takes into account company and management experience, staffing, procedures and controls, portfolio management, CDO administration, technology and CDO performance when producing its ratings, but the agency said that the departure of the two MDs from Uniqa could affect the long-term success of the business because of the amount of collective experience they had and the fact that they were involved in all aspects of portfolio management from credit underwriting to risk management.

The ratings are based on information obtained from the asset managers themselves, Fitch’s own surveillance data, and other publicly available information that the agency thinks is reliable. In practice, though, it’s often hard to find out who is running the show at a new CDO manager and what their qualifications and experience are. “One of our biggest challenges is keeping abreast of who our competitors are. It’s such an opaque market,” said Maley at the conference.

The stigma of being a new manager is strongly felt. At the ASF conference none of the new entrants to the market wanted to take part in a panellist discussion on new players and their impact on the CDO market because none of them wanted to be thought of as new.