Narrowing spreads on collateralized debt obligation liabilities are inducing some alternative managers to increasingly view the CDO manager role as a way to achieve term financing. While most CDOs are structured as arbitrage vehicles and as a way for a buy-side firm to quickly ramp up assets under management while gaining hefty fees, more and more new deals are being done for funding motivations. This is somewhat reminiscent of balance sheet loan offerings that were more typical in the late 1990s, said Joe Naggar, executive director and head of CDO trading and distribution at Morgan Stanley. He noted in some recent cases, which he did not specify, financial sponsors have used the CDO structure to attain funding at low levels above LIBOR and then take the entire equity class.
Jim Stehli, managing director and head of the CDO group at UBS, agreed and noted the shift is largely a result of how far liability spreads have come. "At this stage in the cycle, more people are thinking about [using CDOs as] term funding," he noted.
As for spreads, consensus at the conference was that despite some recent triple-A classes being priced at the LIBOR plus 27 basis points mark, the party is unlikely to last for much longer.