A newcomer in the mutual fund fee private-placement arena, CIBC World Markets recently closed its first 12b-1 privately placed securitization. The $15 million, single-tranched deal, which closed in April, was rated triple- B by Standard and Poors Ratings Services.

"We have several underlying programs for which we warehouse 12b-1 assets that were used in this private placement recently executed. Additional tranches will be used in future private placements," said Michael Hopson, executive director of CIBC's securitization group in New York. Last year, these programs originated roughly over $100 million, collectively.

"We intentionally structured our first private placement at a small issuance level to begin the ratings process as soon as practical and to develop the distribution template for future deals," Hopson added.

CIBC will likely come to market with two to three privately placed mutual fund fee securitizations per year going forward, with a second offering expected to close before the end of 2000.

The company is also looking to do bigger deals ahead.

"We anticipate that as the programs grow, the average deal size will increase," said John Gevlin, managing director of the securitization group in New York.

"I think ideally what we would like to see are transactions in the $40 million to $50 million range," Gevlin added.

He said that though CIBC "is uniquely suited to pursue this product on both sides of the border, being a major Canadian financial institution as well as a major financial institution in New York," the collateral in this deal was exclusively composed of U.S. assets.

As to whether U.S. and Canadian assets will be mixed by CIBC in the future in a single securitization take-out, Gevlin said that this would depend on market conditions at the time the private placement is launched.

A Peek Into CIBC's Overall ABS Program

Though new to mutual fund securitization, CIBC has been in the ABS arena since 1988 as one of the earlier conduit shops.

Since then, the company has securitized a variety of asset classes including traditional assets types such as trade and credit-card receivables and car loans and leases, as well as some of the more esoteric asset classes like film securitization and royalty-stream deals.

"We have a securitization shop here that has structured many different types of asset classes, and can thus bring a lot of creativity to our securitization structures and can provide strong distribution when we sell structured products into the market," Hopson said.

In the last two years, CIBC has also been the number one underwriter of collaterallized loan obligations and collateralized bond obligations.

The company has not stopped looking for other asset classes to securitize. "Over time one has seen an expansion in the nature of the asset classes which are being securitized and that trend continues," Gevlin stated. "We would anticipate that as we go forward there will be more and newer asset classes which CIBC will be bringing to market."

And 12b-1s are "in our view, just a further evolution of the securitization product," Gevlin added.

A Similar Approach

Hopson and Gevlin agree that players active in the mutual fund fee arena probably approach the 12b-1 market place from a similar perspective.

"The strategy is quite similar across our competitors, i.e. these assets are inventoried and then structured for private placement issuance, that's just the nature of the asset class," Hopson said. He explained further that since these assets accumulate very quickly, one needs a liquid means to distribute them.

On the origination front, 12b-1 issuers also likely share the same strategy.

"At the end of the day, when acquiring these cash flow streams from the mutual fund distributor the price paid to the fund is extremely important," Gevlin said. "That's true across all of the players in the market."

Furthermore, also on the origination front, Gevlin mentioned that market participants are employing creativity to increasingly permit sharing of the back-end 12b-1 cash flows with the mutual fund families. He said that these developments have occurred in the last year and a half.

Meanwhile, Hopson emphasized the importance of reliability which CIBC facilities could provide due to the bank's commitment to the asset class and CIBC's strong balance sheet and conduit facilities.

"Reliability is certainly a factor because you have, particularly today, some very large fund families relying upon the financing program to fund their B-share growth," he said.

Developments in the Asset Class

Aside from the development on the origination front in terms of the sharing of back-end 12b-1 cash flows with mutual fund families, another thing participants active in this asset class are increasingly structuring is the use of multiple tranches in transactions.

"This will permit us as an issuer to structure securities at various ratings levels which may fit the parameters of different investor bases more adequately," said Gevlin. "I think going forward you will increasingly see more of this bifurcation which has happened to a great degree in other areas of securitization. In other asset types that's a very common form of structuring technique."

And like other 12b-1 securitizers, CIBC is also "exploring" the possibility of going into variable annuities.

A Healthy Sector

Gevlin is optimistic about the future of the 12b-1 sector.

"You are continuing to see more deal flow going into the marketplace, which from an issuer's perspective is obviously important for liquidity reasons," he said.

He added that there would likely be increased mutual fund fee product coming into the ABS marketplace as more mutual fund families are distributing their product by utilizing B-shares.

"As these mutual fund families increasingly sell B-shares, that creates a significant financing need and securitization provides a very attractive means of addressing that need," Gevlin said.

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