Calyon is considering more managed collateralized debt obligations as a way to mitigate risk in light of a recent move by Moody's Investors Service to put on review for a possible downgrade two classes of SEA CDO, a seasoned CDO completed by the firm several years ago.
Moody's is concerned about two classes of the deal, Series 2003-3 Optimum and Series 2004-1. Both classes reference a static synthetic pool of corporate bonds, some of which have seen deterioration, saidNeelam Desai, v.p. and senior credit officer at Moody's. The 2003-3 series is rated A3 and 2004-1 is rated Aa2. The agency is monitoring the corporations that are associated with the collateral.
The pools, which have a maturity date of 2011, are part of what is a fairly standard synthetic CDO. "As is not unusual in a five- or seven-year transaction, some of the corporates in the portfolio may now be subject to [leveraged buyout] risk, which probably was not the case when the deal was put together a few years back," said Ally Chow, global head of credit markets product management at Calyon.
To mitigate the risks, Chow said Calyon is considering more managed CDOs. "If the deal was managed, the manager could have seen this coming and could have made some substitutions," she said. "We could also bring third-party managed CDO transactions but investors will have to weigh the cost of hiring a manager or bearing the higher risk of rating migration." An investor could either directly hire a manager or hire the manager via the SPV.
Chow said that while decisions like this are not daily occurrences, rating migrations are driven by the quality of the portfolio and how aggressive the structure is. "The portfolio could change as the corporates' ratings change. What is important is the need to mitigate the risk of the deal being downgraded through monitoring," she said.