Prudential Investment Management has set up a manager replacement business, through which it is seeking to take over collateralized debt obligations from managers that are underperforming. Timothy Aker, managing director and high yield portfolio manager for Prudential, said on a panel at the Bear Stearns global credit conference last week that the firm has to date taken over nine CDOs. "It's a full line of business for us; we offer investors not just [our] new issuance, but an alternative [as a replacement manager]," he stated.
"It's an easy way to grow assets under management, without having to do all the structuring," said one rating agency official. On its face, taking over a CDO in distress would not appear to be a profitable venture, since CDO management fees are based on the performance of each class, meaning that an underperforming CDO would be generating scant fees. To make the business line profitable, Aker said Prudential typically will renegotiate a higher management fee before taking over the portfolio.