Having closed its second collateralized debt obligation last week, Centre Pacific, staffed by the former CDO team of TransAmerica Investment Services, has firmly set itself among the ranks of other Los Angeles-based asset management shops with a flare for high-yield investment.
However, unlike some of its west-coast brethren, Centre Pacific is one of the only shops around that is exclusively devoted to cash-flow collateralized debt products - those backed by cash flow derived from an underlying portfolio of securities - which Centre calls a natural progression from its roots as an insurance company-style investment strategist.
"What's important to note is that we came from a buy-and-hold environment, with an emphasis on current income and minimizing defaults," said Heather Creeden, chief executive officer and a senior managing director at Centre Pacific. "We came from an environment where that's how we managed our assets, and we think that's the type of investment style that fits well with cash-flow CDOs."
Centre Pacific was formed on Jan. 7, 2000, just one day after Creeden and her eight-member team left TransAmerica, which was acquired by Aegon USA Investment Management in July 1999.
Creeden's group had worked as a team at TransAmerica for more than seven years - though some members had been with the insurance company since the late 1980s - all specializing in high yield funds management.
John Casparian is Centre's chief operating officer and a senior managing director. Stephen Ahearn, Kevin Hickam, David Gold, and Peter Lopez are all managing directors. Judy Tran is the team's treasurer and controller, while Oilda Jiminez is the senior trading administrator.
Last week, Margaret Azadian, also a veteran of TransAmerica, joined Centre to work on the administration side.
"It's unique that we've been in this business for so long, as a team that has worked together," Creeden said. "So it's not one portfolio manager going out and hiring a couple of analysts. We have experience. We have a track record as a team managing structured vehicles."
In mid-July, Centre Pacific closed its first deal, called Ranier CBO I, with Bear, Stearns & Co. as the lead. The transaction was worth approximately $400 million and backed 100% by high-yield bonds.
Centre Pacific's most recent deal, Sierra CLO I, was also worth approximately $400 million, and will be backed primarily by high yield-loans, and a small percentage of corporate bonds (see ASR 8/21/00). Banc of America Securities and CIBC World Markets were the underwriters.
"We had no problem at all purchasing the bond positions, because that's something that we've done a fair amount of in the last few months, ramping up Ranier," said Senior Managing Director John Casparian. "On the loan side we're on schedule ramping up Sierra."
Though Centre Pacific does not have a rigid deal calendar lined up, the shop is looking to issue frequently, as arbitrage opportunities arise.
While at TransAmerica, the group closed its first CDO in 1996, and subsequently structured one deal each year through 1999, with approximately $7 billion in high-yield assets under management. All-in-all, the group has structured six CDOs, two since forming Centre Pacific, plus four at TransAmerica (and one additional leveraged-loan product, similar to a CLO).
"We did one in every kind of market environment while we were there," Creeden said.
As for the current market, despite the decline in issuance early this year, the vitality of the CDO market and the arbitrage opportunities have not been at issue, but rather the supply in the collateral markets, Creeden said.
"We think that the collateral on loans and high-yield bonds is inexpensive at this point," she explained. "We are a little concerned about some of the volume pick up in the structured product area, [versus] the supply that's available in the collateral market - the high-yield bond market and the loan market."
Like other CDO firms, Centre Pacific is hoping to see new issue volume pick up in the collateral markets. "We still think the arbitrage is there," Creeden said. "The issue is finding the appropriate collateral cheaply."
As for CDOs backed by asset-backeds, Creeden says there's always a possibility Centre will construct one; however, as with bonds and loans, the right collateral can sometimes be tough to find for the right price.
Managing Director David Gold added, "I don't think the arbitrage is that good in [asset-backeds]. I think that it is better in high yield and leveraged loans."
Having come from an insurance company background, and focusing on cash-flow products, Centre Pacific's investment style is conservative, as opposed to total-return players who emphasize active trading.
"I think what you're seeing in this sector is that a lot of mutual fund companies want to enter the [CDO market]," Creeden said. "The problem with that is that the big mutual funds will trade actively. This is not a product that you trade actively."
"We buy for the long-term, which we believe is the proper way to manage CDOs," added Casparian.
Essentially, Centre Pacific is the "investment" of its sponsor/majority owner, a New York-based private-equity shop called Centre Partners Management.
As TransAmerica was exiting the CDO business, Centre Partners was developing research concerning the market and how to form an investment operation. The initial plan would have called for hiring managers to then hire a staff - the more typical way shops are formed, according to Centre.
"Heather was able to piece the two together, putting an established group together with an entity that wanted to get into the business, streamlining the process, and providing a stronger selling point," Casparian explained.
Interestingly, Centre Partners is not only a sponsor but also a significant investor in the equity pieces of Centre Pacific's transactions.
"So it's not that they own us on a passive level, they actually participate [as an investor] in each deal," Creeden said. "As they like to put it, we eat our own cooking."
As for Centre's next deal, Casparian said, "We've got enough on the table for the near-term to finish the final investment in Rainier, and we do have a period to ramp up the final purchases of Sierra, and I think that's the focus right now."