Collateralized debt obligation originators are structuring deals with longer warehouse and/or ramp-up periods to give managers of structured finance-backed offerings more time to acquire bonds in the current tight-spread environment. The pre-closing warehouse period is usually less than six months but some managers are taking as much as twice that long, while traditional 90-day ramp-ups after closing are being extended to 120 and 150 days. The longer periods are giving managers, who tend to buy mezzanine and subordinate asset-backeds because they offer higher yields, more time to source collateral in what has become a competitive market.
"Having four months gives us time to pick our spots; the spread environment could be better then than it is now," says Sheldon Sussman, global head of structuring at Rabobank International, which is in the market with Vermeer Funding, a $350 million static pool with a 120-day ramp-up. It will be 75% ramped-up at closing. Merrill Lynch is underwriting the sale.
One way around this is to have a deal fully ramped-up at closing, which can be done by extending the warehouse period. "In general, managers want the option of a longer warehouse period to give them the flexibility to be more diligent in their collateral selection," says Jim Stehli, executive director and head of structured finance CDOs at UBS.
Longer warehouse and ramp-up periods are sought because spreads on the asset-backeds typically included in these CDOs have tightened dramatically in the last six months. Triple-B minus home equities have tightened by about 250 basis points in the last six months or so, according to one veteran collateral manager. "If you're trying to deliver the same returns, it's a lot tougher," he says, adding that extending a ramp-up period may increase flexibility--but it may also increase risks for investors. "There's a lot of pressure to bring assets in after you've already closed the deal; my concern is maintaining a credit discipline," he says of other managers.
