Collateralized debt obligation managers are having an increasingly difficult time getting allocations on new issue deals, making it more difficult to close on CDOs in the pipeline. Market players said there are several cash flow arbitrage CDOs trying to ramp up, but there is an expectation that deals will get stuck as there are not enough assets in the market to complete ramp up requirements. "It's tougher than first quarter to get allocations," explained Paul Carey, head of corporate banking at Allied Irish Bank and manager of a new arbitrage deal for the firm. Carey explained the bank is currently warehousing assets for a minimum $300 million deal with a target close by the end of the year. But the process is challenging as M&A activity is not robust enough to feed the leveraged loan market, explained Carey, and he expects the ramp up period to take several months. "Supply side deal flow is not significant and on the CDO side, there are a greater number waiting to invest," said Carey.
In response to a race for assets, some managers are said to be structuring transactions to buy small baskets of revolvers on deals in the hope of securing more "B" term loan. Carey has structured a revolver basket into his deal, noting that as a commercial bank the play is less risky as the bank has the capital to respond to potential draw downs. "It's far easier [for a commercial bank] because it's quite demanding and there are many different instruments," he said of investing in revolvers. But Carey said funds can also structure liabilities to support revolver investment. "You need to be able to fund a revolver, so you need to be able to issue revolving liabilities," explained Jeremy Gluck, managing director at Moody's Investors Service, explaining how fund managers need to structure deals to accommodate revolving assets. Gluck declined to comment on structuring trends, but said he predicts the number of CDOs that will close next quarter will decline. "The pipeline is not a meaningful concept, it's how quickly they are getting out of the pipeline that is the question," he said, noting the uncertainty surrounding FASB 94 and spreads coming in on collateral as factors slowing down deal flow.
But managers contend that the biggest challenge right now for getting deals out the door is a scarcity of assets on allocations. "Warehouse periods are getting longer and longer because the secondary market is trading above par and there is so little new issue," said another buysider. Lucine Kirchoff, managing director and head of the floating-rate syndicated finance research group at Banc of America Securities, speculates that a slow down in refinancing along with a dearth of M&A activity have made allocations even tougher to get. "Refinancings are running their course and will likely peak this quarter," she said.