Credit Suisse last week ushered in another first-time CDO manager to the market when it closed the $1 billion Harp High Grade CDO I, a high-grade portfolio of RMBS assets to be managed by New York-based Annaly Mortgage Management subsidiary FIDAC. The deal comes at a time when a wave of new managers - particularly those like Annaly that operate as REITs - have opted to dip a toe into the rapidly growing CDO market.
And while a number of industry players are anticipating greater tiering based on such factors as manager experience, at least in Annaly's case, Credit Suisse sold all the bonds in a single day and demand overwhelmed available securities at the top of the capital structure, according to those close to the deal. The A-1 tranche of the deal priced at 25 basis points over Libor, while the double-A and triple-B tranches priced at 50 and 325 basis points over, respectively.
"I think it was received pretty well," said Matthew Lambiase, executive vice president of structured products at Annaly. "This was our first CDO, so when you do something for the first time, it is a little bumpy and a learning experience."
Lambiase left Nomura Securities two years ago to join Annaly, which in late March hired Gary Gordon, formerly chief U.S. market strategist at UBS, as an executive vice president focused on investment product development within FIDAC.
The billion-dollar Harp deal, which is backed entirely by high-grade RMBS, was initially intended to hit the market at $1.5 billion, but spreads were closing in "between the wall and wallpaper," Lambiase noted. This is a situation inflicting pain on a number of high-grade players attempting to make arbitrage work in the current environment. And despite widening spreads at the lower end of the capital structure, the company, which is traditionally an agency MBS investor, is not considering looking South for yield.
"We wanted to keep the deal pool collateral from a credit standpoint pretty conservative. There were no MTA or 100% second loan deals in our CDO, so it was a pretty high quality pool of collateral that went out," Lambiase said.
Another hindrance to seeking collateral below or outside of the asset manager's realm of familiarity is the need to accumulate the necessary monitoring software and staffing. The company is looking to hire several CDO staffers and would like to become a regular player in the sector - that is, when spreads widen out. Until then, the manager will look to SIV-Lite structures, which are hybrids between CDOs and SIVs, along with other avenues for leverage more suited to a high-grade business model, Lambiase said. Annaly in 2004 acquired FIDAC, which at the time had some $13 billion in assets under management. As of the first quarter, Annaly and FIDAC had combined assets under management of roughly $34 billion. The company buys primarily agency RMBS.
On a side note, Citigroup Global Markets late last month began marketing another deal managed by a player green to the market. New York-based hedge fund VERO Capital Management is set to manage the $400 million Avanti Funding 2006-1, which is backed by cash and ABS. The deal was VERO's first structured finance transaction, according to Standard and Poor's. The A-1 tranche of the deal priced at 30 basis points over Libor, while the double-A, single-A and triple-B tranches priced at 52, 135 and 325 basis points over, respectively.
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