--By Hillary Jackson
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| Ed O'Connell |
Issuance of collateralized debt and loan obligations has slowed to less than a trickle as market participants remain in a defensive mode over the past several weeks and some work out potential restructurings. Globally, CDO issuance dropped to $9.35 billion from $13.17 billion in the second quarter with 14 deals worth $6.43 billion done in the U.S. market and seven deals worth $2.58 billion completed in Europe. "I'm not that optimistic for the foreseeable future; I don't anticipate there being much issuance," says Ed O'Connell, a partner at New York law firm Jones Day. "I think investors are still wary."
The only activity O'Connell expects to see in the short term is possibly some restructuring. "Some banks may get creative in the way they restructure...ways we haven't seen before," he says, noting that new investors will not be targeted. "It will be for existing holders more than packaging for new investors," says O'Connell, whose practice is in structured finance and derivatives with a concentration in both cash and synthetic CDOs.
While O'Connell sees new deals using CDO technology on the long-term horizon, he declined to predict when new issuance might start up again. "I'm a glass-full kind of guy. I hope to see it pick up in the second or third quarter [of 2009]," he says, explaining that confidence in underlying assets must be restored before issuance picks up in full force. This may occur after the uncertainty of the presidential election is resolved regardless of which candidate wins office and if losses are not as severe as people have anticipated, O'Connell says.
Meanwhile, the ratings agencies continue to downgrade deals and report a bleak picture of the current CDO/CLO marketplace.
Standard & Poor's in early October cut ratings on $7.62 billion of U.S. CDOs. In total, the agency has downgraded more than $455 billion of CDOs and said that its ratings on nearly $29 billion more are likely to be downgraded in the future. In its most recent move, S&P lowered ratings on 30 tranches from six cash-flow and hybrid CDOs and removed 16 of them from watch for possible downgrade. Five of the deals are high-grade structured finance CDOs of asset-backed securities, collateralized mostly by AAA- through A-rated tranches of residential mortgage-backed securities and other structured-finance securities. The sixth deal is a CDO of a CDO, collateralized primarily by other CDOs.
Fitch Ratings reported last week that delinquencies for CDOs backed by U.S. commercial real estate continue to rise. The agency's CREL CDO delinquency index moved up for the third consecutive month to 2.39%, with nine newly delinquent loans pushing the index up from 1.79% the month prior.
In a report Fitch said an increase in the number of matured balloon loans would continue to negatively impact the index. Approximately 58% of this month's new delinquencies comprise matured balloon loans.