In order to create a healthy, liquid market for collateralized debt obligations, advisors need to provide education for potential buyers, said Jeremy Smith, chief strategy officer at Secondmarket. “You have to get advisors to help people get smart on the securities out there,” he said in the panel “Overview of the U.S. Distressed Asset and Credit Space: Assessing Areas of Opportunity and Executing Your Strategy” Monday afternoon. “These cannot be isolated efforts, they have to collaborate with among and the ecosystem [of securitization] to get valuations to bring in real bids.” He also called upon all market participants in properly valuing the securities to bring buyers to the market.
Arjun Kakar, director at NewOak Capital, said even some current market players don’t fully understand the securities. “CDOs is an area where investors do not have a full appreciation of the risk they own,” he said. “Our area of focus is trying to get them comfortable with the risk.”
Some ABS CDOs are still overvalued relative to their underlying assets, said Denise Crowley, senior portfolio manager, Zais Group. “It’s not a very deep, liquid market. ABS CDOs have been trading at a discount, but I think it needs to be bigger than it has been,” she said. “It’s quite possible that we will see ABS CDOs continue to lag. Maybe the value pickup becomes attractive.” She said she leans toward deals with more seasoned collateral, where the assets are bifurcated. “The most important thing is probably having a deep understanding of what’s going on with the collateral,” she said.How these deals get restructured will be the question going forward. “There’s still a conundrum as to how much restructuring can happen,” said Steven T. Kolyer, partner, Clifford Chance US LLP. “We’ve been surprised to see 100% consents. [Sometimes] there’s enough distress to tip the senior holders.”