About two years back, Asset Sales Report (ASR's predecessor) profiled United Capital Markets, an ABS-focused broker/dealer and market maker located on an island of the coast of Miami, Key Biscayne. Even then, when trader and Chief Executive Officer John Devaney was running the show solo, he was brewing loyalty with maybe 20 accounts, some of which well known in the ABS market.
Back then, Devaney was proud to say he'd done $300 million in subs for the year, with $2 million in net capital. Things have picked up. Last year alone, the firm moved about $2.5 billion in subordinate ABS, with a net capital at roughly $50 million.
It's been three steady years of flow since Devaney acquired UCM as a platform to launch his ABS broker/dealer. Since our initial write-up, Devaney has added about 15 to his staff, most notably, perhaps, ABS trader Sean Kirk, whom UCM poached from Bear Stearns in early 2001. Imagine that: a relatively unknown, garage-style operation quietly plucking first-rate talent from Wall Street.
With more than 100 accounts, many of the most prominent in ABS land, it's part of Devaney's mystique that he is able to lure from the Street: be it talent, prowess, and, of course, buysiders. Not that UCM necessarily competes with Wall Street for business (as many of the banks are clients too). UCM is exploiting a niche - most notably distressed ABS subordinates - which might be too seemingly risk-laden for credit committees.
Trade secret No. 1: UCM acts mainly as principal in its dealings, often long in the same bonds that it trades, thus aligning its interests with accounts. As few as five of the large investment banks will trade complicated, illiquid, subordinate, distressed ABS as principal.
Also unlike most Street firms, UCM - running thin and nimbly - can head out and meet face-to-face with, say, a special servicer, performing loan-level investor-style due-diligence (we'll come back to that).
"Acting as agent as opposed to principal, it's too hard to tell where the prices should be," Devaney said. In fact, UCM will sometimes buy a small chunk of a deal just to gain investor diligence privileges, so that it can judge the fundamental value.
Though essentially operating below the radar for the past few years - as these kinds of trades generally happen discreetly - UCM let the market know its name when it hosted what ASR dubbed the "the first securitization rock concert" at Information Management Network's ABS West in Arizona - good food, good booze, and good music - as former rock sensation Blues Traveler headlined.
Without a doubt, United Capital has made itself known in the ABS market, and is a shop to be reckoned with, perhaps trading more distressed and story ABS than any of its competitors. The firm is moving between $200 million and $400 million through its books each month. In 2001, the firm's after-tax revenue topped off at $35 million, and, in 2002 has booked approximately $27 million in revenue during the first quarter alone. Although this kind of flow probably isn't sustainable, Devaney anticipates a $75 million year, which would be well over a 100% increase from 2001.
Wall Street/Schmall Street
Okay, trading as much as $400 million in sub bonds per month, and this guy drives a golf cart (with a blown-out headlight) to work each morning.
On an average day, the entire crew at UCM is in shorts and golf shirts, each facing an array of four LCD flat screens with, of course, Bloomberg, Intex, Outlook, the works. The parrot, squawking in the background during ASR's first UCM profile, is gone, but then again Devaney no longer lives at the office, so the cage has moved a few blocks away, where Devaney, his wife and newborn daughter live.
Out where the backyard would be, were this not an island, Devaney keeps his 100-foot yacht, The Positive Carry, docked, and fully staffed.
FYI: The Positive Carry heads up to New York this week for the summer, and will house a mobile trading floor, so that Devaney, when in town, can keep on brokering and dealing potentially several hundred million dollars in bonds right there on the boat. Has that been done before?
Blood, sweat, risk, and loyalty
UCM first began building its name on a series of high-LTV trades during the tumultuous 1997 to 2001 period, marked by the bankruptcy of FirstPlus, a liquidity crisis, and uncertainty in the relatively untested sector. When everyone-and-their-mothers wanted to sell, UCM was one of a few, if not the only shop willing to bid, believing that the bonds, though illiquid, were fundamentally sound, especially in light of where they were trading.
"There are factors that move bonds prices that don't have anything to do with the fundamentals," Deavney said. "In this case, a massive wave of supply widened the 125 sector, then fear widened the sector further, but then fundamentals drove the market back in."
In fact, UCM argued the protection and O/C levels built into 125s made them a better bet than many home-equities. Though the firm definitely takes risks, it bets on structure - not market sentiment - and tends to shy away from highly leveraged deals that can, for example, "fall off a ledge," Devaney said.
UCM was buying the FirstPlus triple-Bs between 600 to 1000 over the curve, and the double-Bs at 45 to 60 cents on the dollar. Since then the triple-Bs trade 400 to 350 to the curve, and the double-Bs trade 96 cents to par on the dollar, a more fundamentally reasoned valuation. According to Devaney, not one triple-B in the entire universe of 125 LTVs has lost principal.
In another (still) controversial perspective, United Capital has seen value in the B2, corporate-guaranteed manufactured housing bonds from Green Tree (now Conseco Finance). These bonds, which carry ratings anywhere from Ba3 (Moodys) to BBB (Fitch), are a sort of hybrid corporate/ABS, which Devaney argues could be a better bet than the triple-B rated B1s at current dollar prices of 50 cents.
In its analysis, UCM sees Conseco Finance as netting positive $700 million cash in a liquidation, after settling all liens (which is, itself, fairly controversial). Since there are about $1.5 billion outstanding guaranteed bonds, Devaney sees at least a 46 cent recovery, deal structure aside.
"These B2 bonds in many months have an opened principal payment window returning cash at 100 cents on the dollar, as a result of higher losses, while the triple-B bonds, single-A, double-A bonds are all locked out, and do not receive principal," Devaney said. Running these bonds with the assumption that Conseco makes it for two years, the sum of the principal guarantee payments, the 14% to 16% current yield, and the afore mentioned recovery of 46 cents on dollar in bankruptcy makes these bonds perform better than their triple-B counterparts, even into worst case scenario.
"Obviously with Conseco surviving, these bonds are home run," Devaney said. "We think Conseco survives."
Of the $160 million in Green Tree B2s traded in the secondary market over the last four months, the firm picked up approximately $90 million, placing the bulk and retaining $12 million.
UCM is also, predictably, involved with franchise ABS, arguably the most distressed sector out there. Though the firm has been most active in franchise IOs, Devaney is also an advocate of certain FMAC bonds - the 1997 seniors and 1998 current pay classes - betting they will outperform trading levels. The firm's close relationship with FMAC, and its trust in the information provided on workouts and performance, is UCM's hands-on approach to loan-level information. In this case, Devaney is not only looking at the level of delinquency, but at the stability of that level, the probability of recovery, and future performance, basing much of his assumptions on a flow of information between FMAC and UCM.
Devaney illustrated several other examples of what he believes is hidden value, including certain interest-principals/interest-principals (IPIP) classes that accrue interest (and interest on interest) even when the coupon is turned off. "We're out there scouring around looking for bonds that are a good deal," Devaney said. The gist of it, however, is that the firm bets on structure, and in some cases, where deals are not modeled on Intex, builds its own loss model, and makes its assumptions based on deal-specific, often loan-level information.
A recipe that works
Like other broker/dealers, the firm has a hierarchy of accounts, giving first preferred treatment, and dibs on what it believes is untapped value, to its longest standing clients.
"Without the downstream distribution capability, you couldn't be a secondary market maker," Devaney said. "For the customers who provide us with the downstream distribution, we have the utmost loyalty. Protecting them and their interests - by not selling them anything that we wouldn't own with our own money - has been the biggest strength of this firm."
UCM has more than 100 accounts, though as many as 85 are sellers only. "You only need 15 accounts to take down $2.5 billion," Devaney said. "A lot customers will come into this market only to sell."
Though Devaney would not specify accounts, many have a had record performance in the last three years, outperforming peers dramatically, many in the top 1% of their relative groups.
For the time being at least, UCM does not plan to establish a sales force, because, as Devaney puts it, these bonds are too complicated for someone to peddle who isn't intimately involved in the valuation process. Thus, accounts talk directly to the traders - Devaney and Kirk - who understand the bond-specific models.
Beyond the Key Biscayne-based ABS headquarters, UCM runs a three-man CMO desk in California, which traded $3 billion in CMOs last year.
Simultaneous to launching the brokerage firm in 1999, Devaney launched United Real Estate Ventures and, more recently, Biscayne Island Charters. UREV is an owner of top-line corporate retreat destinations, currently running three properties - including 11 acres of beachfront property in Vero, north of Miami, and an estate on a secluded island in the Bahamas called Cat Cay. The company is in the process of acquiring two additional destinations.
"We're building the best corporate retreat facilities in the nation," Devaney said, with amenities such as helicopter landings, glass-walled conference rooms for board meetings, fishing yachts, ATVs, jet skies, you name it.
All in all, Devaney is trying to keep it diversified, should an event shake any of his markets. So far, the bond shop, which is considering adding a research staff and possibly a high yield trader, has not had one month of negative P&L in three years of trading and owning story ABS.