NovaStar Financial is planning to issue its first CDO next year, according to company executives. The move appears to shift the Kansas City-based subprime lender into a growing trend of subprime lenders and Wall Street investment banks seeking growth and cost efficiency through vertical integration.
"It's a way to put capital to work at good returns," said Scott Hartman, NovaStar's chairman and chief executive, said last week during an investor conference. Hartman said the issuance, which - according to one market observer - is expected within the next six months, will be used as a source of matched-term financing. The company is considering selling only highly rated bonds and keeping the subordinated pieces on its balance sheet.
NovaStar operates as a real estate investment trust, a model employed by a barrage of new managers to the commercial real estate CDO space. Overall, 34 first-time CDO managers entered the market between October 2005 and June 30 according to a recent Standard and Poor's survey - double the number of first-time managers reported in the rating agency's last study, and 14% of all new-issue cash flow CDOs rated by the agency.
While Wall Street is looking to buy up various parts of the subprime lending sector in order to create more streamlined asset-backed sales operations, some mortgage lenders are beginning to do the same by contemplating entering into asset management. As origination volume declines and selling loans to the secondary market through either whole loan sales or securitization begins to lose its appeal amid declining margins, lenders have no other choice but to lower costs and diversify revenue sources, market participants said. "We've evolved to become more of a widget-making business," Hartman stated.
Calabasas, Calif.-based mega-lender Countrywide Financial Corp. recently announced it might be looking to acquire an asset management business. This lender also has plans to extend its U.S. Treasurys primary dealership to include derivatives and futures. "We are looking at specific opportunities (in the capital markets area), and hopefully some of these deals will reach fruition in the next couple months," Angelo Mozilo, Countrywide's chairman and chief executive, said during the company's third quarter earnings conference call in late October.
Countrywide executives have said they plan to leverage their access to mortgage product and related infrastructure by expanding further into fee-based asset management such as CDOs and private equity funds, among other sectors. "As we get into the asset management business, it is not our desire to compete with core fixed income asset managers, but rather to look at where we can bring value in our knowledge of the product, our access to the product and the ability to add these new products like the private equity fund and CDOs," Ron Kripalani, president and chief executive of Countrywide Securities Corp., said at an equity investor forum presentation held in New York on Sept. 12.
The infiltration of new CDO asset managers has been a bit of a hot-button issue among more seasoned asset managers. Industry participants are careful to point out, however, that not all "new" CDO asset managers are new to the space; they may be spin-offs of larger shops, very familiar with the collateral, or simply crossing to a new asset class. Harding Advisory, for example, which ranks as the seventh-largest CDO of ABS manager in S&P's latest survey, would have been considered a new asset manager when it set up shop in 2005 with a number of key staffers under Wing Chau from Maxim Group.
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