Due to volatility in asset-backed securities, dealers have been shutting down high-grade collateralized debt obligation warehouses and/or tightening their lines of credit. "If dealers have too much risk, they'll sell the collateral they can get the highest price on first," said Fred Matera, co-head of structured credit at RBS Greenwich Capital Markets.
According to Securitization News, a CIN sister publication, over the past several months volatility in ABS spreads has picked up dramatically. This has led to mark-to-market losses on some CDO warehouses. As a result, rumors have been rampant about dealers closing down warehouses, with fingers pointing to Goldman Sachs and Credit Suisse. "The ramp-up was slow and the arbitrage wasn't great," said one senior CDO official of the situation at Goldman. RBS had also been tipped as part of the trend but Matera categorically denied the rumor. "The volatility presents unique opportunities to buy and transact with customers," he said. Goldman and Credit Suisse officials declined comment.
As an alternative to shutting down, some dealers are being more selective in the credits they are allowing into the warehouses. "If the arrangers say they will allow only their deals into the warehouses, it creates a squeeze on liquidity," said James Frischling, head of U.S. structured credit at Fortis Securities. "While [the practice] wasn't uncommon before, it's really hit a high point very recently."
While the volatility may be temporary, the market may see longer-lasting consequences. "I think structures will come back that are friendlier to debt investors than equity, such as bringing back triggers," said one CDO official.
