After issuing its first CDO in the U.S. just last year, Deutsche Asset Management has gotten its foot in the door of the booming U.S. CLO marketplace thanks to a new agreement with Columbia Management under which DeAM will manage the day-to-day operations of Flagship Capital Management's six CLOs.
DeAM, which is Deutsche Bank's global asset management business, and Columbia announced last week they had reached an agreement under which DeAM will act as sub-investment advisor for Flagship's CLOs. Flagship is an affiliate of Columbia, Bank of America's primary investment arm.
This will be DeAM's first foray into leveraged loans. While some of its high yield bond products have invested in loans on occasion, the firm had no investment vehicles dedicated solely to the asset class.
As sub-advisor, DeAM will take responsibility for all the customary services, including client services and managing the CLOs' investments. However, Columbia will be listed as the advisor. The transaction, which is not yet finalized, is expected to be completed during the first quarter of 2006.
Management team to move
As a result of the arrangement, Flagship's management team will move to DeAM's New York office. This includes CLO team head Ty Anderson, who will become managing director and global head of syndicated loans at DeAM. Other Flagship senior portfolio managers who will transition to DeAM include Eric Meyer, Colleen Cunniffe and Richard Britt.
The deal reflects DeAM's interest in entering the CLO business and Columbia's interest in getting out of it. DeAM began hunting last year for a CLO team like Flagship's as part of a larger effort to widen the scope of its CDO business, explained Bart Grenier, managing director and global head of fixed income at DeAM.
"We have a big footprint in the CDO area globally," he said. "[This is] an extension of our overall strategy."
Columbia decided to hand over the daily management responsibilities of its CLOs to DeAM to focus on its core functions, which include taxable, tax-free and money market business.
"We feel the best way to proceed is to focus on those," explained Tom Gariepy, a Columbia spokesman.
DeAM is no stranger to the CDO market. Grenier said the firm manages 16 European CDOs, which primarily utilize ABS and investment grade corporate debt. However, it had yet to venture into CLOs. DeAM closed its first U.S. CDO last year, which primarily consists of ABS.
"When we looked at the CDO marketplace, we recognized that the CDOs that are comprised of loans represent about 50% of the market globally," he said. "Even though we were a significant player in the CDO space, we were lacking a loan capability. The strategy was to round out our offerings in the CDO space."
DeAM decided it would rather look for an existing CLO team to bring on board than start from scratch, Grenier said.
"We have been going out and looking for loan talent, and we were fortunate to find what I consider to be a world-class group at Flagship Capital," he said.
European expansion is possible
In addition to assuming the day-to-day management responsibilities of Flagship's six CLOs, which represent about $2 billion in assets, DeAM is also aiming to initiate a CLO under the DeAM brand by year's end. Grenier also said the firm is very interested in investment opportunities on the other side of the Atlantic, where the leveraged loan market is growing at an even more frenetic pace.
"We look at this as a global business. It wouldn't be surprising for us to round out our loan capabilities globally," he said. "We are continually evaluating opportunities and may hire people in Europe."
Grenier also said the firm may consider launching other vehicles that invest in leveraged loans other than CLOs. "It wouldn't be unreasonable that we would leverage this capability in mutual funds, or perhaps separate accounts," he said.
Flagship was started in 2000 as a subsidiary of Fleet Boston Financial. It became part of Columbia when Fleet merged with Bank of America in 2004.
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