Underwriter Importance Grows In Tough Year For CLO Mart

The role of the underwriter in collateralized loan obligations is growing more critical in ensuring a deal clears the market, especially in a year when finding investors has proved such a tooth-pulling task, according to bankers and buyside managers. In a year full of defaults and downgrades, plain vanilla structures typically are not flying with investors. The underwriter has had to step up more in the last couple of months, stated Ty Anderson, ceo of Flagship Capital. "There have been some new structures, and the junior tranches particularly are migrating," he said. "You don't just put a single A or double B tranche into the market."

Investors are demanding more because they are paying more attention to structure, said Paul Forrester, a partner at Mayer, Brown, Rowe & Maw. There has been a paradigm shift as Triple A investors dig into details that only equity investors would have done a year ago, he said. The heightened inquiry has come in the last six months, and has been accompanied by a revamping of scrutiny by the rating agencies. Many investors have incurred losses, and they have realized you have to pay attention to the structure and the manager, he notes. One explanation Forrester proposes is that CLOs are increasingly using structural features that were previously used for other types of collateral, such as interest diversion tests, and protection against buying trades at a discount to build par.

The role of the underwriter should become even more critical next year, as some traditional markets for CLOs dry up and new investors come into the fold. "It comes down to distribution and selling the equity," stated Mark Smith, ceo of ING Capital Advisors. Smith noted ING is currently looking for an investment bank for a new CLO planned for next year, and there is a series of questions the group is addressing. "What investors can be accessed, can the banks coordinate global reach, use private banking networks and tap the burgeoning pension fund markets?" Smith commented.

He said another issue is the increasing importance of supporting a deal after closing. This can take the form of providing Web sites that improve transparency, and being aware of deal prices, he noted.