The collaterised debt obligation market has nearly tripled in a year, and the lack of qualified staff at the trustee firms, coupled with the pressure to get deals done, is leading to fears of corners being cut. As Neil Day reports, the market could be storing up trouble for the future.
"Following a recent acquisition of a rival business, our client is now the major global force within corporate trust. As a result they are embarking on a period of significant growth and seek a number of talented individuals to join them in a variety of business areas including collateralised debt obligations (CDOs)."
No prizes for guessing which firm might be behind this job ad, posted on the internet at the beginning of May by recruitment consultants Joslin Rowe.
When Bank of New York took over JP Morgan Chases corporate trust business as part of an asset swap with the latter last April and propelled itself into pole position in the industry, it didnt take long for mischievous rivals to dub the combined operation "the departure lounge".
Jim Maitland, managing director, global trust services EMEA at Bank of New York in London himself a former JP Morgan staffer says that retention rates have improved over the past year.
"As always, with any such announcement, there was an initial level of anxiety," he says, "but we were largely very successful in quelling any fears and reaffirming Bank of New Yorks commitment not only to the business, but to people individually and they took a lot of heart from that.
"We spent a large amount of time ensuring that the staff were engaged and understood their role in the success of the business, and saw that the business was going to be operated in a stable and committed way, and that helped dramatically."
BoNY has clearly lost none of its appetite for mergers: in December it announced that it was merging with Mellon Financial Corp, although this transaction did not directly impact the corporate trust business.
However, Maitland acknowledges that the main factor behind staff retention may be exogenous: "It is largely attributable to the general market environment."
Or, as one outsider says of JP Morgan: "They are absolutely boiling over with CDOs."
Issuance of cash-funded CDOs in the European market was forecast to hit Eu100bn for the first time this year and, according to figures from the Securities Industry & Financial Markets Association, issuance in euros and sterling in the first quarter was running at more than 2-1/2 times that of the same period in 2006.
Judging by the job market, Bank of New York is not alone in hiring. Another, less immediately identifiable firm ("leading custodian") seeking a CDO administrator recently was outbidding its rival, offering up to £38,000 versus the £35,000 of benefits identified in the BoNY ad.
One firm is offering £500-£800 a day for a CDO relationship manager although the six month contract suggests that someone is hearing the patter of tiny feet. Industry insiders say that the boom in issuance is creating a real shortage of qualified staff and that anyone taking a break, whether or not it is for maternity/paternity leave, is going to be sorely missed.
"Nobody has enough people," says one specialist in London. "The market is overheated, issuance is extremely rapid, and there is a real danger that people are simply not stopping to look at what they are producing."
One lawyer warns that the pressure to get deals done is putting trustees as well as their legal advisers in a tough situation. "There is no real appetite for real, sensible documentary review," he says. "If an arranger says to a trustee you can have this deal provided that you do it as it was on the previous deal, the trustee then doesnt want a full legal review. Mistakes that are creeping into the documentation in the rush to get deals out are then being perpetuated over and over again."
Emerging market worries
This hastiness is said to be particularly problematic for emerging market-related transactions.
"It is quite remarkable how everybody is just pouring money into these countries when their legal systems are not as developed or as stable as ours," says the lawyer. "In less congenial jurisdictions like Russia, Ukraine or Kazakhstan you might have a bit of a problem if you did try to enforce, if anything went really wrong.
"You could end up holding security in a land which might simply not recognise a court judgement because the courts might not be consistent. In one offering circular I read for a deal from Ukraine it said that there isnt a hierarchy of courts there."
In the frenzy of issuance such warnings are quickly ignored, but, in the words of John Kenneth Galbraith, recessions catch what the auditors miss.
"We are in a very buoyant environment now," says one specialist, "and even when there was the wobble in the US subprime mortgage market that didnt stop London running around like mad things. But what happens when the cycle turns?"Im told by colleagues that some houses now have special units going through these badly produced deals looking for gaps, seeing where the drafting has gone wrong. The activists are just waiting for something to go down and then they will be crawling all over these deals."