Nov 27, 2007 20:22
CDO Managers Win Back Warehouse Access
Asset Backed Alert, Harrison Scott Publications Inc. (June 8, 2007)
Investment banks are once again warming to the idea of writing warehouse lines that enable CDO issuers to accumulate pools of subprime-mortgage bonds for their future deals.
Citigroup, Merrill Lynch and UBS have been among the first to show a renewed interest in the business, after pulling lines of credit from many CDO managers or placing moratoriums on writing new ones when the subprime-mortgage business went into its funk four months ago.
Their reentry began a few weeks back, with facilities meant to fund purchases of high-grade subprime-mortgage bonds that issuer clients will eventually use to back their CDOs. And over the past week or so, they've started lending to shops that want to put together portfolios of mezzanine securities.
That said, warehouse lenders aren't being nearly as generous as they were at the start of the year, when frothy market conditions on both the asset and liability side meant unhindered access to capital for most CDO managers. Rather, the banks are largely reserving new warehouse lines for proven players, and they're subjecting borrowers to much more rigorous reviews.
Cohen & Co., Ellington Capital and Trust Company of the West, for example, recently received green lights to build up pools of subprime-mortgage bonds that would back upcoming CDOs.
Of course, those same top-tier issuers maintained access to existing warehouse lines for that purpose all along - it was just harder for them to secure new ones when the banks tightened their purse strings. It was a tier below in the issuer hierarchy that lines were being called, and for the most part, the issuers who were blackballed by warehouse lenders still have a tough time accessing cash.
But warehouse lenders have been making some exceptions to their bans on less-established shops. Take aspiring CDO issuer Terminus Asset Management, which opened its doors just three months ago but was still able to secure a $1.5 billion warehouse line from Citi. It is using the facility to accumulate mortgage-related securities and CDO pieces rated single-A or better.
Citi's decision to extend the line to Atlanta-based Terminus may have had something to do with the presence of a high-powered backer that has given the operation a good dose of credibility. But it has also given other issuers hope that more of them will eventually be able to endure the recently toughened due-diligence gauntlet. "A lot of folks are saying, 'Hey, Terminus was able to get a warehouse line, maybe I can too'," one source said.
Even the issuers that still had the means to build up batches of subprime-mortgage product often remained hesitant to do so, as the values of those securities plummeted, dragging the CDO sector down along with them. Instead, many focused on repackaging other types of securitized instruments, leveraged loans and the like.
Part of the reason why players on both sides have become more willing to venture back into subprime-mortgage securities is that the values of those investments have recently rebounded almost to their pre-crash levels. Triple-B-rated bonds with five-year lives, for example, have been trading around 200 bp over Libor.
Warehouse lending can be a double-edged sword for investment banks. For many, the business is a valuable one that can help win the loyalty of issuer clients that use the institutions' other services, including bond underwriting. However, there's always the threat that the banks will be left holding the bag if the underlying assets run into trouble, rendering CDO issuers unable to repackage them into longer-term funding mechanisms.
To help allay related concerns, many banks are swinging terms of new warehouse lines further in their favor, as opposed to hiking fees. For instance, warehouse lenders have been declining to share as much risk as they would have in the past, and in many cases they also expect to pocket a good chunk of the excess spread from the resulting CDOs.
For Merrill in particular, building back up as a warehouse lender is a big step. The bank was extending lines to a vast field of CDO issuers when the subprime-mortgage industry's troubles came to a head, and is believed to have taken the biggest hit among its peers as a result. In fact, it is widely estimated that Merrill's clients were warehousing $8 billion to $10 billion of subprime-mortgage bonds through the bank at the time.
securitization,
credit risk,
cdo