HypoVereinsbank last week priced a E1.5 billion collateralized loan obligation with a bulked up roster of managers, a strategy that may become more common as CLO investors grow increasingly concerned about the liquidity of CLO paper. "A lot of clients like to see perceived liquidity and more of them are asking for more names," said Chris Tessler, head of institutional sales at HypoVereinsbank in London, explaining why J.P. Morgan, Credit Suisse First Boston, Bear Stearns, and UBS Warburg co-led last week's Gelidilux 2001-1. Tessler said clients are tired of firms buying deals without creating a market for them. He said the balance sheet deal would have been a tougher sell to bond investors without other names on the book and he expects more CDOs and CLOs, domestic and European, to have an increasing number of banks leading deals. Tessler noted that typically a deal the size of Geldilux would have been executed by one or two firms.
Brian McManus, first v.p. of high yield strategy at Merrill Lynch, agreed with Tessler that banks may start to make moves to answer investors. "There's no question that liquidity is becoming a bigger and bigger issue," he said. But McManus said he thinks an increase in co-leads on deals is most likely to be seen first on balance sheet transactions. "It's more competitive on the cash flow deals," he noted, explaining that arbitrage deals are managed and managers develop close relationships with a lead arranger over a ramp-up period--a relationship a structurer may not want to share. Typically, on a balance sheet deal, the institution removing assets from its balance sheet also arranges the sale of notes to fund the special purpose vehicle that will securitize the loans or bonds. In this scenario, a bank is just carving out some of the business.
And size does matter. Another high-yield sales banker noted that a typical cash flow, arbitrage deal is between $300-500 million versus balance sheet deals that often exceed $500 million. "No one wants to get in a deal just to sell fifty million in bonds," he said. He noted, though many players are willing to suffer smaller allocations than usual, just to get into a competitive business. "On a cash flow deal, you might see two or three leads, but not four," he predicted.