With credit deteriorating, collateral managers of collateralized debt obligations are pushing for extended ramp-up times for their deals. Scott Roberts, president of Deerfield Capital Management in Chicago, a collateral manager that has originated 13 CDOs totaling $6.5 billion, says that, "having the flexibility to have the longest ramp-up as possible is crucial" because the manager needs to buy the best possible bonds for the deal. He adds that, "If we are not comfortable with the ramp-up period, we won't do a deal with a dealer."
Ramp-up refers to the period of time a collateral manager has to buy the underlying assets and it usually expires well after the closing date of a deal. The length of the ramp-up and the proportion of assets that may be bought after closing time are negotiated with the underwriter, which provides warehousing or a line of credit for the collateral manager to buy assets before the actual issuance of the notes.
Collateral managers indicate that a comfortable ramp-up time for their deals before closing, is a couple of months for high-yield CDOs and three to six months for asset-backed CDOs, to which they add approximately two to three months after close. "Beyond those levels, you get complaints," says one of them. Collateral managers are not asking for a specific extension to the ramp-up periods. "The extra time needed cannot be generalized. It varies depending on the deal, on how much has been funded at closing and on the manager," says a senior official with a large bond insurer. "If you have a short ramp-up, you may be forced to buy whatever is out there, not necessarily what you would like to buy," adds Arturo Cifuentes, managing director with collateral manager Triton Partners.
A CDO syndicate chief says that dealers are willing to negotiate with the collateral manager in several ways, one of them being the option to buy more assets post-closing. Yet, this solution can anger equity or bond investors, who ideally want the deal fully funded at closing time, in order to avoid negative carry or the mismatch between assets and liabilities in the structure.
However, the syndicate official says most dealers are willing to give some leeway, allowing for 50% of the assets to be bought after closing for a corporate bond CDO, although this proportion drops to 20-30% of the total of the assets for ABS structures. The difference relates to the fact that there is less supply available for ABS than for corporates. He stresses that giving a manager more time or flexibility to ramp-up the assets creates "ramp-up risk" or the risk that spreads down the road may tighten up, making the collateral more expensive to buy than the initial purchase spread target. "The dealer's ability to be more flexible entirely depends on the manager's willingness to share in the risk of a deal not getting done," he concludes.