-- Aaron Johnson & Olivia Thetgyi
More than half of the roughly 200 U.S. managers of collateralized debt obligations of asset-backed securities could exit the ABS CDO business next year as dwindling CDO issuance and the increasing number of deals hitting event of default turn the taps off on manager fees, said David Yan, head of CDO research at Credit Suisse. Speaking during a panel discussion at Opal Financial Group’s CDO Summit in Dana Point, Calif., Yan said only the larger managers will be left. An investor on the panel agreed. “If there is going to be new issuance, we need to sit down with the best-of-class underwriters, agencies and managers and ask how to roll out a good product again,” he said.
The number of ABS CDOs hitting events of default may rise to more than 100 next year as their underlying collateral continues to deteriorate and downgrades continue, Yan said. Thirty-three deals have already declared EOD. In the event of default, CDO manager have a high risk of the management of the CDO being taken away from them, thus shutting them out of fees. Fees for senior and sub management have been around $1 million per year per deal, which is approximately 10 basis points for a $1 billion high-grade ABS CDO, and 25 bps for a $400 million mezzanine ABS CDO, said one portfolio manager.
In addition, ABS CDO issuance next year may be a paltry $20-30 billion in the U.S., compared with $120 billion this year, Yan said. Typically, smaller CDO managers would be affected, those with three or fewer deals under management. In some cases, it may be a strategic decision by the CDO manager to leave the business and actively sell off their CDOs under management.