While the U.S. collateralized debt obligation market continues to flourish, off-shore asset managers, from South Africa to Singapore to London, are jumping into the game.
In some cases Asset managers new to the CDO business participate as a sub-advisor and substantial equity holder to get a look over the shoulder of a seasoned CDO manager before bringing their own deal.
This may partly explain why Italy's Gruppo Monte Paschi Asset Management (GMPAM), as a sub-advisor, is buying a substantial portion of the equity and looking after the European high-yield bonds (about 25% of the deal) in Trust Company of the West's (TCW) upcoming Euro GEM VI emerging market CDO.
At E275 million, GEM VI will be the largest emerging market (EM) CDO denominated in Euros and is expected to be one of the most diverse, with about 60% EM sovereign debt, 10-15% EM corporates, and 25% euro high-yield bonds. The deal is stepping-up its marketing effort via Deutsche Bank Alex. Brown, and has chosen Ambac U.K. to wrap the E205 million (73%) triple-A notes.
Meanwhile, CDO sources say, of the 12 or so visible Euro denominated CDOs issued to-date, there exists approximately a 75% overlap in the underlying assets in these deals, which may make TCW Euro GEM VI an attractive trade for diversification purposes.
TCW's Nathan Sandler, with a five-year track record in EM CDOs, has six under management and has never experienced a default, sources added.
TCW has reportedly tried to execute the Euro GEM VI trade with JPMorgan and Morgan Stanley in the past, but eventually needed the expertise and relationships of a European bank to place the critical equity in the deal, buyside and Street sources said.
Ambac's Financial Service unit will provide the deal's interest rate swap, which is new ground for Ambac. Euro GEM VI has a maximum rating factor of 2120 and a diversity score in the 22-23 area. A final legal maturity OF 12-years, a non-call three-year, and a reinvestment period of five-years is in place.
Meanwhile, it's said that Rand Merchant Bank is expected to take all of the equity in their upcoming $400 million (par amount) high-yield CBO, RMB CDO II, via Goldman Sachs. This helps explain why the deal has such an unusually large equity tranche of 16% ($64 million) of par. The trade is slated to price at the end of this month.
RMB, based in South Africa, has hired Ambac to wrap the transaction's senior tranche and will use Chase Manhattan Bank in London as a trustee, keeping all the moving parts in place.
Sources familiar with the deal said that this is RMB's second U.S. CDO transaction and, other than the unique location of the asset manager, the deal is structured as a typical U.S. high-yield CBO.
The transaction will be backed by a minimum 65% U.S. obligors, 80% straight bonds, and a synthetic securities bucket of up to 20% that is likely to be utilized.
The rating factor is 1800 area (B1/B2). RMB is believed to be taking the warehousing risk in the deal, and the issue is expected to be 70% to 80% ramped-up prior to closing in July. The diversity score is 39 and the minimum rating for the assets is Caa2'. The reinvestment period is five years and there is a non-call three-year in the deal.
Also, UBS Warburg Principal Finance London is said to be readying an E1billion CDO, although 80% will be unfunded credit default swaps. The reference pool is said to be 50% ABS and 50% investment grade credits. UBSW is leading the deal.
