CDO defaults can be expected to rise sharply by early 2008, with up to 100 breaking default triggers, compared with 33 at present.
So says David Yan, Credit Suisse’s head of CDO research. Total Securitization reports Yan’s comments from a discussion at Opal Financial Group’s CDO summit in California.
If a CDO triggers an “event of default” then the most senior noteholders are given the option to liquidate the structure should they so desire. Of the 33 CDOs currently in default, only five have gone into liquidation; 3 Westways CDOs, Carina and Adams Square I. As FT Alphaville reported last week, in the case of Adams Square, liquidation saw noteholders completely wiped out.
Entering default, as Alea points out, needn’t spell disaster. Pacific Coast has been in default since October 2004. And the Westways CDOs have returned notes at par on senior debt. Only the equity tranches have suffered.
The downside is that now, with a wider systemic crisis in play, there’s more chance of senior noteholders opting to liquidate. If they do, it may in turn trigger a firesale, as prices in portfolio assets are depressed from sales and other CDO senior noteholders rush to liquidate too.
Spare a thought, though, for those poor CDO managers. Half of whom can be expected to be jobless in 2008, according to Yan. Dwindling CDO issuance ($20-30bn expected next year, compared with $120bn this year) and rising defaults (under which managers are often replaced by appointees of the senior noteholders) will hit the smaller CDO firms hardest.