Collateralized debt obligations of asset-backed securities have become the most popular type of CDO, but that has caused ABS spreads to tighten and may mean some managers can't ramp up their deals. "It's becoming challenging to ramp up a portfolio," explained Perry Inglis, managing director and head of the European CDO group in London. He added that, some deals might sit in the pipeline until spreads widen again.
The problem is that the spreads CDO investors are demanding hasn't changed, but the underlying assets have. Inglis predicted three outcomes: spreads on CDO liabilities tighten; the deal structure changes to create more of an arbitrage; or the deals get shelved. The structural change would likely revolve around gaining access to cheaper funding, such as the commercial paper market.
