Managers of collateralized debt obligations who restructure their deals in novel ways by taking a hit in seniority or on fees would be able to circumvent the pending consolidation requirements under the Financial Accounting Standards Board's FIN 46 directive, according to CDO accounting experts. But, these solutions are seen as a Catch-22 because they could limit the manager's flexibility or reduce the revenue generated from the managed CDOs. FIN 46 is set to take effect July 1, forcing managers to either restructure around the directive or consolidate deals onto their balance sheets.
Marty Rosenblatt, a partner at Deloitte & Touche and widely recognized as the industry's expert on FIN 46, says CDO managers who give equity holders the right to replace them without cause would be exempt from the consolidation requirement.
Dan Castro, head of structured finance research at Merrill Lynch, adds these managers would skirt FIN 46 because they would not be primary beneficiaries of the deal if equity holders had that right. Experts say this option would leave managers vulnerable to fickle equity holders who could replace collateral managers at will.
Managers could also choose what Rosenblatt calls an extreme solution: lower their fees to receive less than 50% of residual returns and not be the primary beneficiary. "And they may not want to do that," he quips.