Nomura Asset Management has just completed warehousing loans and bonds for a $400 million, cash flow collateralized debt obligation and will be pricing the deal in about two weeks, despite what many have described as a tough CDO market. Officials at Nomura declined to comment. Goldman Sachs will underwrite the deal and has reportedly worked with the company for the last six months to get the CDO structured, as it has suffered delays due to challenges Normura reportedly faced finding equity investment. An official at Goldman Sachs declined to comment. Tranche sizes for the deal could not be determined.
Market sources noted that there is interest in ramping up CLOs and CDOs as good buying opportunities exist on the collateral side. But when it comes to actually closing deals slow issuance of strong credits has made it more difficult. "There's good product out there but there's not enough and the paper is expensive," said one buysider, noting that even though credit structures have improved, a lack of volume on these types of deals means investors still have to buy some of the older ones. Finding equity investment to get deals done is also a challenge as more investors are eyeing deals carefully after experiencing the burn of recent defaults.
CLO shops cannot jump-start a slow m&a environment halting new deal flow. But offering cash flow structures rather than market value structures has become a way of answering equity challenges as cash flow vehicles are not as sensitive to near-term market volatility. "You don't want to feel the pressure to liquidate a portfolio during a period of market turbulence," said one product manager, describing the downside of a market value structure right now. In addition, cash flow deals only require shops to raise an 8-10% equity investment while market value structures require roughly 20%. Another manager noted that ratings agencies have stricter collateralization requirements, stress tests, and coupon tests on cash flow vehicles as a protection to investors as only a maximum of 20% of the vehicle can be traded at one time.