Nothing Tops Vanilla, Except A Few Sprinkles

December 3, 2007

Remember the simple life? A bank loan was a bank loan and a junk bond was a junk bond. Investment vehicles knew their place in this world, and after a long, hard day of being launched and priced and traded, they'd meander down to the malt shop to swap a few stories and share a tasty vanilla shake. Those were the days.

Back before everything cruised into kooky mode, with all these wacky structured vehicles. Why, down in Mexico, they're securitizing trees! These people with their collateralized this and structured that, they're ruining everything for everybody!

Actually, this last statement is kind of true, tongue and cheek as it may be. The mortgage-backed securities market and its previous hunger for subprime does have a rather large role to play in the mess we all find ourselves in now.

Of course, dreaming up novel structures doesn't create a dilemma in and of itself. In fact, innovation in general has been known to lead to many a positive development, in the financial markets and beyond. It is the inability to maintain some semblance of restraint and prudence in moments of supposed success that can and does create problems. In other words, blame not the forces of market innovation but the forces of greed for bringing us to where we are today.

So now, we see back to basics. The structured world is embracing plain vanilla, and don't get me wrong-I love vanilla shakes. Not to mention that this newfound appreciation for the most humble of flavors bodes quite well for the CLO market (as you can see by our front page story from Gabrielle Stein). And maybe, in certain circumstances, there does come a time to take a step back.

Still, I would hate to see markets shy away from innovation. And so I give kudos to Credit Suisse, which recently came up with the novel idea of auctioning off loans to finance the secondary buyout of the French funeral operator OGF. (See Market Buzz, next page.) While this is obviously not the solution for every deal, as one head of the bank's European syndicated loan group points out, it does acknowledge that investors with different motivations will pay different prices for debt. And if that's what it takes to get this particular deal done, if it works in this case, I say more power to them. Because even though vanilla may have its moments, more often than not, life's challenges can best be met with a big bucket of chocolate sauce and a jar of sprinkles.

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