Warehousing
Candlefocus EditorThe purpose of warehousing is to protect the investors (or issuer, if rates have risen before the issuance) in case the assets' value changes due to macroeconomic forces. Grade warehousing also serves to protect investors from the risk of defaulted assets in the CDO, as these are typically handled before the securitization occurs. As long as the assets remain in the bank’s custody, the institution can manage the risk associated with them.
The duration of the warehousing period typically varies from two to three months and is usually a separate entity from the underwriting bank. The bank carries out a thorough evaluation of the assets, their risk and the structure of the CDO prior to confirming the offer to investors. Additionally, the bank must acquire any regulatory approvals required for the transaction to proceed.
Since warehousing entails taking on a large quantity of the risk associated with the CDO, the bank charges a warehouse fee to cover the costs and risks. The fee is typically assessed annually and can range from 0.15% to 0.75% of the total transaction amount.
In conclusion, warehousing is a critical and necessary part of securitization and one of the major responsibilities of the underwriting bank. It provides an important layer of protection for the investors from any changes in asset values or sudden defaults. This process ensures that the integrity and marketability of the CDO remains intact and allows banks to cover their costs and risks associated with taking on this responsibility.