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Systems for CDO management:
building a deal machine
Becoming a CDO manager used to involve                                            fice (owned by JP Morgan and
nothing more complicated than setting up                                          unrelated to Wall Street Analytics),
                                                                                  Atlantic Information Services and
a few spreadsheets to track the portfolio.
                                                                                  Deloitte & Touche CDO Suite.
But the complexity of CDO compliance                                              Deal model and data provider Intex
tests and reporting requirements – along                                          is a special case – offering pricing,
with the demands of investors and ratings                                         modelling and analytics rather than
agencies – are forcing managers to put                                            tools for administration. Wall Street
serious systems in place for this business.                                       Office also occupies a special niche,
                                                                                  having effectively cornered the mar-
We look at how three managers are                                                 ket as a bank loan database provider.
tackling the challenges and at what third-                                              A typical platform offers any-
party products are currently available                                            thing from modelling the structure
                                                                                  of each new deal on behalf of the
“Do you spend valuable time setting           Meanwhile, for CDO manag-           manager and setting up the compli-
up your deal models and compliance       ers, a relatively basic spreadsheet      ance tests so they can be monitored
tests?” “Are you confident that you      environment remains the simplest         through the life of the deal, analys-
are accurately tracking your trades?”    solution for portfolio management        ing risk and concentration across
“Are you able to efficiently recon-      and the associated administration.       multiple portfolios, running cash-
cile with your trustee?” “Will your      These systems are cheap and easy to      flow projections, generating front
CDO management system require            set up, but easily become manually       office to back office reporting, and
time consuming, manual updates to        intensive. They are also less secure     providing other services such as cash
asset level data in order to conduct     than more high-tech solutions,           management and trustee notifica-
hypothetical trades?” These are          which allow for audit trails and con-    tion and reconciliation.
questions directed at CDO manag-         trolled access to different parts of           Besides asset managers, the
ers taken from the web pages of se-      the system.                              software providers target their
curitisation software vendor Lewtan           Notes Sunay Shah, CEO of            services at sell-side structurers and
Technologies.                            CDO management software pro-             investors.
     For many a CDO collateral           vider CDO Software: “There are                 “On the asset management side
manager wrestling with a stack           two aspects of operational risk to       usually we get involved pre-closing
of multiplying spreadsheets, the         consider. First, managing multiple       at the warehousing stage,” notes
answers to these questions are an        spreadsheets gives rise to inconsis-     Luis Amador, managing director at
emphatic yes, no, no and yes. But        tencies in the integration of data. If   Wall Street Analytics in New York.
the fact that software vendors exist     information is having to be updated      “We provide the system to load the
to ask the questions is a sign that      multiple times – for example, when       assets during the ramp-up, and work
things are starting to change.           updating a price or changing a data      with the managers on the model-
     Historically, one of the big-       range – errors can naturally arise.      ling of any term sheets from the
gest weaknesses has been the link        Secondly, there is the question of       underwriter. We model the capital
with the trustee. “Five years ago the    how you go about auditing your           structure of the CDO, and tie out
technology was not there,” says a        activity.”                               the returns and performance num-
US-based CDO manager. “For ex-                Like other solutions, CDO           bers to the underwriter before the
ample, you would go to the trustee       Software allows users to define          deal closes. Once the deal closes,
for a scenario analysis and ask ‘Can     varying levels of access to the sys-     we deliver a finalised version of the
I replace the bond and how does          tem. “The client can define who gets     structure. ”
that affect all the compliance tests?’   access to do what,” he says. “When
By the time the trustee got back the     a user is logged in they are assigned    Growing business
trade was no longer there.”              a role that determines what access       Aladdin Capital Management,
     Since then, competition for         they get. That can vary depending        CypressTree Investment Manage-
CDO business has forced the trust-       on whether you are a front office us-    ment and Deerfield Capital provide
ees to raise their game. “Trustees       ers, a middle office user and so on.”    examples of larger CDO managers
have had to invest in operational             Lewtan Technologies and             that have turned to third-party ven-
infrastructure,” says a North Ameri-     CDO Software are among a hand-           dors as their businesses have grown.
can CDO manager. “A host of              ful of vendors that offer specialist          “It has been a continuous evolu-
CDO trustees entered the market.         CDO administration and portfo-           tion,” says Jason Morris, a director
That competition was good, because       lio management software. Other           in structured credit at Stamford-
it forced trustees to differentiate      vendors in the space include Wall        based Aladdin Capital. “As we have
from an operational perspective.”        Street Analytics, Wall Street Of-        grown, we have focused on building

14                                                                                     1 September 2006

                  CDO Software provides cutting-edge management
                  tools for the structured credit market.

 Tools for
  effective decisions
Single controlled environment      Eliminate proliferation of spreadsheets
Mitigate operational risks         Interface with internal/3rd party data feeds
Fully audited                      Transparency to make better informed decisions
Exposure management                Integrated solution from trade capture to reporting
Use internal/3rd party analytics   Cross-asset environment including life settlements

                                   CDO Tools™
        CDO Director™              CDO Scheduler™              CDO Tracker™

 To learn more, visit or email us at
SPECIAL REPORTSPECIAL REPORT                                                       of Aladdin’s CDOs.
  Focus on synthetics                                                                   “At that point we were three
  Systems for synthetic CDO managers are emerging as a growth area for             deals deep on the CLO side and also
  CDO software vendors. “Whoever can offer a system that hits the con-             had a cash flow investment-grade
  cerns of the synthetic CDO manager will grab market share,” says Jason           bond CDO,” says Morris. “The sys-
  Morris, a director in structured credit at cash and synthetic CDO man-           tem got us away from a spreadsheet
  ager Aladdin Capital. “The ability to integrate with the rating agency           environment and worked very well
  models will be a key to success.”                                                for what we needed at the time.”
     He says the manager is in “exploratory mode” with vendors about soft-              Subsequently, Aladdin has
  ware provision for its growing synthetics business. One of the firms Alad-       looked to a combination of suppliers
  din is talking to is recently established software vendor CDO Software.          for its CLO business. It uses Wall
  “They have features built with this asset class in mind,” says Morris. “They     Street Analytics for its compliance
  are the first that seem to be specifically targeting this niche.”                engine. It also has access to Wall
     CDO Software was co-founded by Sunay Shah and Brett Paton in                  Street Office’s portfolio manage-
  2005. Independent consultant Geoff Chaplin started working with the              ment engine through an outsourc-
  firm later that year.                                                            ing arrangement with a bank and
     Shah says that strong features of the CDO Software platform include           trustee company.
  the ability to look at the exposures in the lower level of a CDO squared.             “On the portfolio management
  “You can drill down to the lowest level and look at the effect of any spe-       side, loans require a lot of work
  cific underlying,” he says. “For a CDO-squared you can look not just at          – they are always amortising or
  the reference CDO but also its underlying reference assets.”                     restructuring,” notes Morris. “Wall
     He adds: “Breaking down your risk and concentrations within an indi-          Street Office’s portfolio manage-
  vidual reference pool is done easily using a ‘drag and drop’ function. Simi-     ment system is best of breed for
  larly, when aggregating across all deals, you can do so seamlessly at the        loans, but you have to spend. It is an
  touch of a button.”                                                              expensive product.”
     Adds Paton, who is CDO Software’s chief technology officer: “Some-                 Competitors concede that Wall
  times with vendors it is not easy to get data in and out of the system and       Street Office has a strong market
  to move it around. With CDO Software you can simply copy and paste               position as a result of its bank loan
  data into any of the applications and automate the import and export of          database. “They got in first,” says
  data very easily. Features include a ‘play pen’ area, for looking at substitu-   another vendor. “We have a full
  tions. To perform a substitution you simply drop it into the ‘play pen’.”        bank loan administration capability,
     Links to external data sources include Markit’s bond and credit de-           but we are not in the business yet
  fault swap prices and reference entity database, along with Standard &           of collecting all the agent notices
  Poor’s and Moody’s rating feeds. The platform is also integrated with            [notices of loan issues] and creating
  CDO modelling providers. Clients can choose their own preferred ven-             a database.”
  dors and feeds.                                                                       Meanwhile, WSA’s compliance
     The platform currently works using a predefined view for rating agency        engine scores strongly, according to
  CDO models. “You can cut and paste from the application to the rating            Aladdin Capital’s Morris. “WSA
  agency model,” says Shah. “However, we are working on a solution that            is among the better players,” he
  will involve running the model within the application and storing it down        says. “Their compliance module is
  in a central database.”                                                          particularly strong. It allows us to
     It is early days for the platform, which launched in March this year.         perform a whole host of tasks in ad-
  However, Shah says that discussions are advanced on both the issuer and          dition to the basic calculations, such
  investor sides.                                                                  as projecting waterfalls. “
     He adds that CDO Software is not limiting itself to the synthetic mar-             Morris adds that as the firm’s
  ket. “We set up initially on a synthetic basis, but we are near to comple-       CLO count has grown, cross-deal
  tion on integrating cashflow CDO products.”                                      analysis has become a key require-
                                                                                   ment. “It is vital to be able to slice
out the appropriate infrastructure         and synthetic investment-grade          and dice the investment portfolio,”
from a compliance and portfolio            corporate transactions which rely on    he says. “You can have the same
management perspective at a busi-          proprietary in-house systems.           loans and issuer across multiple
ness unit level. Each system has                For the CLO business, Aladdin      portfolios, so when news breaks on a
been developed with a particular           initially used Lewtan Technologies      name it is very important to be able
asset class in mind.”                      as its third party vendor. Deut-        to quickly determine which deals
     Aladdin uses third-party soft-        sche Bank, which partnered with         have been impacted.”
ware for its CLO business, which           Lewtan in developing its web-based           CypressTree is also using a
includes eight deals. The firm also        CDO portfolio management sys-           combination of WSO and WSA
manages cashflow CDOs of ABS               tem, iCDO, is the trustee for several   for its CDO business. The Boston-

16                                                                                      1 September 2006
based firm manages a clutch of           deals. The software package has           over 800 CDO models, is also part
cashflow CLOs, including a market        handled those different types of          of the service.
value CLO, together with a syn-          deals extremely well.”                         Asset types supported by the
thetic CDO of mostly high yield               Maley says that investment in        CDO platform range from high
names. “WSA sits on top of the           systems in the synthetic ABS CDO          yield and emerging market debt to
WSO database,” says Burke Malek,         area is a way of gaining competitive      banks loans, structured finance and
fund accountant at CypressTree           advantage. “A lot of people are do-       CDOs, foreign exchange, credit
Investment Management. “We use           ing a lot of synthetic deals, but there   default swaps, trust preferred securi-
WSA to produce daily monitoring.         have been no major trigger events         ties and interest rate swaps.
It produces the key ‘stats’ that the     yet. However, those managers that              Vendor solutions don’t tend to
portfolio managers want to look at       can efficiently and effectively track     come cheap. For example, WSO’s
through extensive macros, replacing      those types of deal will outperform.”     portfolio management system is
the need to crunch the numbers by             The cashflow market continues        described by one CDO manager as
hand.”                                   to account for the majority of the        “not something a one or two [deal]
     He adds: “It allows for easy ma-    business done by CDO management           CLO manager can afford”. Another
nipulation of the data, for example      vendors. However, investment in           manager says that the cost of a ven-
when looking at hypothetical trad-       operational technology for synthetic      dor platform is enough to wipe out
ing. It is a great compliance engine.”   businesses is showing increasingly        a large chunk of the fees from an
                                         on the radar at CDO issuers. “Syn-        individual deal.
Handling hybrids                         thetics are in some ways easier than           Different vendors take different
Meanwhile, Deerfield Capital has         cashflow deals,” says Morris at           approaches to pricing. WSA, for ex-
turned to Atlantic Information           Aladdin Capital. “You don’t have to       ample, charges an upfront set-up fee
Services (AIS) for third-party soft-     worry about things like amortisa-         along with an initial licensing and
ware. The Rosemont, Illinois-based       tion, weighted average coupon and         support fee that includes training,
firm manages 24 CDOs, includ-            weighted average spread. Moreover,        support and upgrades, according
ing five mainly investment-grade         you are managed to model, so the          to Amador. Fees then increase on a
corporate CDOs, nine CLOs and            synthetic CDO models at the rating        per-deal basis.
10 CDOs of ABS.                          agencies are in a sense your compli-           But if CDO managers are
       AIS provides CDO manage-          ance engine.”                             tempted to scrimp on infrastructure
ment software called CDO Sentry.              “Synthetics are more simple          investment, they have the rating
The platform grew out of the port-       to track internally,” agrees Malek        agencies to contend with. “The rat-
folio management software that           at CypressTree. “It is easier to do       ing agencies want to see that you
was developed internally by CDO          versus cashflow structured credit.”       are adding personnel as the busi-
collateral manager, Atlantic As-         However, synthetic deals bring their      ness grows and that you have the
set Management. AIS is run as a          own complexities. “It is the nature       necessary systems,” notes a CDO
separate company, and has roughly        of the synthetic business that a deal     manager. “If a manager is running
25 clients, including US as well as      tends almost to split into multiple       half-a-dozen deals and is still run-
European CDO asset managers.             deals because synthetics are so flex-     ning its system off spreadsheets, the
       “Our CDO management plat-         ible,” says Morris at Aladdin. “You       rating agencies will bring that up as
form has evolved progressively as        need a system that handles that.”         a concern.”
the business has grown,” notes Pat                                                      He adds: “Whether a rating
Maley, director of ABS at Deerfield      Volume growth                             agency would not rate a CDO based
Capital. “We use CDO Sentry for          Meanwhile, ballooning structured          on operational concerns is another
checking compliance, looking at          credit outstandings suggest there         question. It would be unlikely that
cashflow projections and for ‘what-      is good business to be done by            they would not rate a deal.”
if ’ scenarios. One of the things we     vendors. “We are seeing about 50%              Nonetheless, the rating agen-
like about the system is that it was     [client] growth from the same time        cies play a valuable role as providers
developed by someone in the CDO          last year,” says Amador at Wall           of quality control. Partly for that
management trade. AIS’s support is       Street Analytics. “The most recent        reason, operational deficiencies tend
excellent and the platform has been      growth has been greatest in CLOs.         to be far less of an issue in the CDO
extremely responsive to the develop-     CDOs of ABS has been the second           management business than is the
ment of our business.”                   most active area.”                        case for many hedge fund managers,
       Adds Lonnie Merta, associ-             Wall Street Analytics’ desktop       or even large sell-side dealers.
ate analyst at Deerfield Capital:        asset management application is                For vendors that is good
“Initially we were a fully distributed   called CDOnet. A web-based prod-          news. Even with the most budget-
cashflow CDO business, but have          uct called CDOcalc caters specifi-        conscious CDO manager, they may
gone on to do hybrid cash synthetic      cally for investors. A global CDO         find themselves knocking on a half-
and single tranche non-distributed       library, which currently contains         open door.              Euan H aggEr

1 September 2006                                                                                                    17

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