A fear there are too many greenhorn collateralized debt obligation managers has investors concerned, but they also think only a credit blowout will tell them which managers have the necessary skills. That was the buzz among panelists and delegates at Information Management Network CDOs/Credit Derivatives Summit in New York last week. "We have seen a lot of new managers recently, at least 20 since the summer," Jennifer Vento Johnson, director of CDO management at Standard & Poor's in New York, told attendees. "But the market is not differentiating among them."
Demand for managers is on the rise as spreads grind tighter and investors seek to rely on managers to pick out the hottest new structures in a rapidly growing market. Managers are taking advantage of this and smaller players are raising fees to compete with the big boys--which is pushing the noses of established groups out of joint.
But panelists agreed the market will start discriminating once there is a credit correction. "A downturn will come, and that's when you will want a good manager," said Mark Steinman, director at Assured Guarantee. Volkan Kurtas, structured credit specialist and asset manager at Bayerische Hypo-Und Vereinsbank, added, "Going forward, I think managers will matter more."
Tight credit spreads across asset classes and new documentation for trading credit-default swaps on asset-backed securities have contributed to increasingly complex structures. "The synthetic ABS market has gone from zero to 60 in the last six to nine months," said Eric Rothman, executive director at UBS. And investors want these deals managed for greater flexibility and comfort, panelists said. Most investors do not have views on ABS the way they do on corporate credits and managers have familiarity with documentation, understanding of correlation, ability to manage credit migration, protect rating and navigate out of trouble.
