After a two and a half year hiatus, Structured Finance Advisors is plotting a return to the primary CDO market. The Farmington, Conn.-based asset manager is currently talking to underwriters about returning with a static-pool high-grade structured finance-backed CDO, its first new-issue offering since June 2002.
SFA has yet to begin acquiring collateral for its upcoming transaction, said SFA President and Founder Joe Lorusso, but "we should begin acquiring new collateral once a lead manager is named," Lorusso said, which he expects to occur in the coming weeks. Pricing is expected either late in the first quarter or early in the second quarter 2005.
Unlike SFA's previous CDO offerings, Lorusso plans to add a performance-based asset manager fee to the upcoming offering, set at 10 basis points, with a senior position in the cash waterfall, assuming equity returns clear an 8% hurdle. As asset manager, SFA will have the ability to trade collateral based on its proprietary monitoring system, but what and when it trades out of positions will be limited.
Its internal rating system, which ranks bonds on a scale of one to four, SFA has predicted ratings downgrades by more than three months at a 60% clip, according to Lorusso. "Excluding instances of fraud," added Lorusso, "over the eleven years [of SFA's existence] a single-A or better bond that we have purchased has never defaulted."
Lorusso began modeling a hypothetical portfolio for the upcoming CDO roughly three months ago, after noticing the trend of static high-grade structured finance-backed deals sweeping the CDO market.
Among the challenges facing SFA is the turnover the firm has experienced. Portfolio manager Chris Donnely left the firm in 2003 and currently works at distressed ABS specialist Mesirow Financial. Analyst Jennifer Quizenberry left the firm and works at TIAA-CREF.
Analyst Jennifer Bourret, who analyses historical data from servicer reports and monitors the ongoing performance of the underlying securities, joined SFA from Credit Suisse First Boston in September 2003. Analyst Jason Stypolkowski, who models and analyzes monthly servicer reports, joined SFA in September.
SFA's previous transactions, of which it priced on e annually in 2000, 2001 and 2002, have shown mixed performance since pricing. SFA's series 2000-1 offering has seen its initially triple-A rated senior notes downgraded multiple times and currently sit at BB' by Fitch Ratings and B2 by Moody's Investors Service. SFA's series 2001-2 senior notes remain at triple-A by both Fitch and Moody's, but were downgraded to AA+' by Standard & Poor's in July. The series 2002-1 offering has not experienced any ratings downgrades.
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