With the market's appetite for collateralized debt obligation/collateralized loan obligation structures all but vanished, the late-morning panel at The Deal's Innovative Deal Financing Conference discussed where the opportunities for profit have arisen. The panel, moderated by Jay Kim, a partner at Ropes & Gray LLP, included Arturo Cifuentes, managing director at R.W. Pressprich & Co.; Randy Schwimmer, head of capital markets, Churchill Financial; and Joseph R. Mason, associate professor at Drexel University.
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To start off, Kim outlined some of the major issues affecting the CLO market and brought up the point that with the crisis in CLO activity, "one man's pain, is another man's gain."
Cifuentes commented that the CLO market is in paralysis, but hasn't collapsed. CLOs supported by middle-market loans and emerging markets have done very well; investors who bought subprime loans without thinking have extended their panic to the CLO markets.
Mason felt that the major problem is a lack of information, specifically that buyers don't know where the losses lie. Until the information gets through to markets, the situation isn't going to do change. He predicted that "we're in for slow growth until we clear up this information, but not necessarily a recession."
Schwimmer said that the middle market has been one of the bright spots, going strong in spite of the recent turmoil. With things easing up in the past weeks due to the Fed's actions, investors (investment banks, hedge funds and private equity) have been getting funds together to buy debt on the secondary market at a discount. Although part of First Data Corp.'s debt financing was sold, it represents only 2% of the debt associated with buyouts that must be sold. Over the next six to nine months, a lot of new ideas will arise on how to get all that debt sold. Investment banks are coming back with warehouse facilities and doing CLOs, but the terms are looking very different; instead of asking for 5% equity, they're asking for 25%. —George White
See The Deal’s Sept. 21 analysis of the CLO market
See The Deal’s Aug. 29 story on bank buying LBO debt
See the full coverage of the Innovative Deal Financing Conference
