Despite CREMAC's recent sale of $180 million in high-yield bonds previously earmarked as collateral for the firm's first CDO offering, it intends to issue its three CDOs this year using different collateral, said Joseph Cafiero, president of the New York-based asset management firm.

CREMAC is turning up its nose to high-yield bonds right now, and despite accruing some $60 million in new-issue home equity ABS in recent months, is not thrilled about much of that sector's prospects right now either, Cafiero said. CREMAC plans to launch its arbitrage cash flow CDOs this year in the commercial mortgage-backed security, mezzanine, and high-grade sectors, he said.

Cafiero said the firm has scaled back asset purchases due to difficulty finding value in the currently tight spread environment, and is more likely to issue the CMBS and high-grade CDOs before a mezzanine offering materializes. Residential mortgage assets he said are likely to suffer from deteriorating underwriting criteria - an opinion that is pushing the firm to pursue CDOs backed by commercial mortgage assets instead.

"We're going back and buying commercial mortgages, and we are going back and getting closer to the asset than buying bonds. That is why we have the concept of buying commercial real estate CDO, B-note and mezzanine assets, because we have the ability to really drive to credit and the asset," Cafiero said.

CREMAC is not the only asset manager thinking along those lines. Commercial real estate CDO issuance could exceed $15 billion this year, up from $8 billion in 2004, according to Moody's Investors Service, and while deal sizes historically have been small relative to collateralized mortgage-backed securities, at $300 million to $500 million, larger deals - in excess of $1 billion - are in the pipeline, according to Moody's. (see ASR 6/6/05)

Cafiero said the risk involved in holding the high-yield bond equity in a CDO structure was not worth the expected payoff.

CREMAC last summer purchased the $215 million portfolio of bonds from CDO manager Flagstone Capital with the intention to build its first CDO - a common strategy first-time CDO managers use in order to break into the market, according to industry sources.

"We were planning on taking that portfolio and increasing it by another $100 million" before pledging the high yield collateral for a CDO, said Cafiero. "We were looking for a large portfolio that we could use as a springboard into [the CDO market]," he added. However, CREMAC ended up finding a better deal by selling the portfolio rather than securitizing it, he said. Credit Suisse First Boston recently bought the majority - about $163 million - of that portfolio via a negotiated trade, Cafiero said. Some other small issues were also traded out. CSFB did not return a request for comment.

CREMAC decided to hold the remaining $28 million to $31 million of the portfolio, said Cafiero, which consists primarily of the distressed bond debt and equity of such issuers as Conseco Inc., GenTek Inc., Metromedia Co., Exide Technologies, and Fruit of the Loom, Inc. The $180 million in high yield exposure that CREMAC sold off consisted primarily of non-distressed assets, Cafiero noted.

(c) 2005 Asset Securitization Report and SourceMedia, Inc. All Rights Reserved.

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