The difficulty in finding attractive asset-backed and leveraged loan securities for inclusion in CDOs is prompting some managers to consider rotating underwriters.
Unlike other fixed-income markets, the CDO business historically has been one in which managers do repeat transactions via the same dealers. Other issues, such as a desire to achieve broad distribution to new investors, are also fueling the trend but some professionals said it is noteworthy just how important sourcing collateral has become. They declined to name specific managers considering a switch.
Mark Gaw, head of the CDO manager evaluation group at Standard & Poor's in New York, stressed that the bank chosen to underwrite a transaction is less important than the assets chosen. "If a manager is doing this for the good of the deal, then that's fine," he said, referring to rotating underwriters.
One CDO manager said while access to collateral is by no means the only reason a manager would choose a specific underwriter, it is increasingly becoming a more important factor in the beauty parade. The increase in CDO sales and homogenization of the ABS market into one dominated by mortgage-related paper is fueling the trend now, noted one rating agency analyst. "It's tough to get a lot of paper with spreads so tight and new issuance not where it was. New issues are usually oversubscribed and despite everything with [New York Attorney General Eliot] Spitzer, there are still preferred customers," he noted.
A by-product of the hunt for collateral and subsequent underwriting decision could result in too much exposure to any one dealer, one analyst warned. "If you do a deal and 40% of the assets come from the bank that is underwriting the deal, then that calls for more due diligence," said Arturo Cifuentes, managing director and head of CDO research at Wachovia Securities in New York.
