The U.S. collateralized debt market is likely to see a major shift from one dominated by cash deals toward a market in which new vehicles backed by a synthetic pool of assets are more prevalent. Scott Eichel, senior managing director and head of the credit trading desk at Bear Stearns, said the growing use of synthetic asset-backeds makes it easier for managers to ramp up a deal quickly by taking synthetic exposure and not being forced to source bonds. He expects a significant shift to occur during the next year. Also fueling the trend is that managers are incentivized by CDO fees to ramp up deals as quickly as possible, so it makes more sense for them to use derivatives if it will take longer to acquire bonds, panelists said.
This shift will have an impact on the asset-backed market as the CDO bid softens. Eichel and others predicted the frenzy over new deals will die down and force new sales to take a few days of marketing to find buyers, instead of the more typical few hours that has become so common due to demand from CDO managers. Although this should not have a major impact on the underlying market, Michael Barnes, partner and co-founder of Tricadia Capital, a CDO manager, noted the CDO bid is a major liquidity provider to the ABS market and by extension loan originations. "You've got this machine that needs to be fed," he said, referring to the pace of originations.