The recent downgrade of British Energy, which in turn prompted downgrades for three static collateralized obligations, has some CDO bankers even more wary of static style deals. These same types of deals have been hit before by events surrounding Enron, WorldCom, Tyco, Qwest and the like, says one CDO expert of the recent CDO downgrades.
British Energy was downgraded from Ba3 to Caa1 last week, which caused tranches of Scirocco Investments, Spices Finance Limited and CDO Master Investment to take ratings hits. "If you put together a portfolio based on a statistical analysis of the likelihood of a default, you cannot anticipate a British Energy or an Enron or a WorldCom," says Fraser Malcolm, head asset-backed trader at Dresdner Kleinwort Wasserstein in London.
Going forward, managed deals will become more palatable to investors simply because a good manager should be able hedge out risk. A manager's ability to take some early losses on a trade and repair damage done to a CDO portfolio hit by a credit event, will differentiate the good managers from the mediocre, says Malcolm.