Potential investors should be given access to monthly collateralized debt obligation trustee reports, says Dan Patton, v.p. of corporate trust in the CDO division at Wells Fargo Corporate Trust. Patton says that opening the reports would be a "simple and quick fix" to the lack of transparency that plagues the secondary market for CDOs.
At present, when dealers underwrite a CDO they draft legal documents that require trustees to keep information limited to the initial investors in a deal, rating agencies, underwriters and other parties. Patton thinks denying access to trustee reports, which contain live information on the performance of the underlying collateral, deters potential bidders who may want to buy the bonds on the secondary market. Patton, at a secondary trading panel at the conference, stated, "You simply need to make a change in the legal documents."
Improving transparency in the CDO secondary market is on the minds of many. Nadine Cancell, v.p. and general counsel at the Bond Market Association, says the dealer community is in the early stages of studying the feasibility of a central repository. "I support his idea," she says about Patton's suggestion, but she adds "there is more to it than that," as Patton's view only solves the legal hurdle. "Then you need to define a mechanism on how to get the information to [Securities and Exchange Commission] qualified investors," she says. She declined to give more details on the central repository.
When asked at the panel if he shared Patton's view, Kris Kraus, CDO trading director at Credit Suisse First Boston, said, "You would not get a lot of resistance from us." But, he stressed that because CDOs are private transactions, "it is not totally clear what can be done from a legal perspective." He referred to the private nature of CDO transactions ruled by the SEC's Rule 144A, which requires deal information to be kept confidential.
"Some managers are more sensitive than others on the assets that they own," he said, stressing that in some cases, the game is dictated by the originator of the deal, not the Street.
Interviewed later, Patton argues that, "Assuming there are no legal prohibitions, I believe attorneys would be amendable to this change, at the underwriter's direction."