Perhaps one of structured finance's most sought-after banking teams, Chris Ricciardi's investment-grade corporate and ABS CDO structuring group, of Credit Suisse First Boston, placed nine deals for $3.5 billion in the first half, and sees no slowdown in sight.
"Basically we're closing about one and a half deals each month," Ricciardi said.
ABS-backed CDOs accounted for six of the nine, and the firm is maintaining a run-rate of about one ABS CDO per month. According to a list derived from Thomson Financial and IFR Mortgage Data, CSFB's $2.1 billion in ABS CDOs for the first half is nearly three times the No. 2 manager, Deutsche Bank Alex. Brown ($750 million).
So how did these guys get so hot?
CFSB's investment-grade team is a conglomerate of talent from three firms. For example, Ricciardi came of over from Prudential Securities with the several others when ABS group co-head Joe Donovan migrated last winter. Of the eight vice presidents in Ricciardi's group, one came over with Ricciardi from Pru, four were already at CSFB, two came from Donaldson Lufkin & Jenrette when the firms merged last fall, and one came from law firm Brown & Wood.
In addition to the eight VPs, the structuring group includes three associates and seven analysts, and is essentially broken into three subsets, one focusing on ABS-backed deals, one on investment-grade average deals, and one on synthetics/special projects.
Apart from the investment-grade group, CSFB's high yield CDO effort brought $1.5 billion worth of deals to market.
Good where it counts
Ricciardi attributes the team's success to three basic factors: experience in the business, access to collateral, and distribution.
"We think our experience in ABS CDOs is significantly better than what others have," Ricciardi said.
On the collateral side, he notes CSFB is strong in the assets classes that mesh with ABS CDOs: be it home-equity, commercial mortgage-backed securities, aircraft, timeshares, and other products with attractive sub bonds.
"In the asset classes that matter, we have the most product," Ricciardi added.
On the distribution front, under Greg Richter's syndicate group, there are three traders dedicated to CDOs. "We work very, very closely with trading," Ricciardi said. "Greg came over from Prudential as well, and he was instrumental in doing the first asset-backed CDOs."
In 1999, while still at Prudential, Ricciardi and the Pru team brought the first-ever ABS-backed CDO, called DASH I, or Diversified Asset Securitization Holdings, via collateral manager Asset Allocation & Management.
Since the initial few deals in 1999, there's been upwards of $20 billion in ABS CDO issuance, about 15 of which closed in 2000, for just under $10 billion in proceeds. Through the first half of 2001, there have been 18 ABS CDO deals, for about $6.5 billion.
"I think there's going to be further growth and a broadening of the asset class," Ricciardi said. "There are more and more investors who want to broaden and diversify their portfolios of CDO holdings, and they're naturally looking at things like asset-backed CBOs, which are about a third of the CBO market these days."
So far there haven't been any downgrades in ABS CDOs, although the product is clearly newer, with less history than the high yield counterpart.
"Pricing spread levels have gone down a lot compared to competing products, which are basically high yield CDOs," Ricciardi said. "We're seeing more investor acceptance. Previous deals have done quite well, which I think has helped the product."
Unlike other types of cashflow CDOs, ABS-backed deals are sometimes being structured for reasons other than arbitrage/management fees. For issuers like C-BASS, the CDO, which was brought by CSFB in the first quarter, was a funding mechanism.
According to Ricciardi, there will be an increased use of ABS CDOs as financing vehicles for operating companies. As another example, issuers such as hedge funds might use CDOs to finance term positions.
Ultimately a CBO is...
As for the equity sell, which has reportedly been a challenge for underwriters this year, Ricciardi said that experienced CDO investors have learned to see a CDO for what it really is, a leveraged exposure to a particular risk, rather than an esoteric asset class all its own.
"Ultimately a CBO is really just a technique for getting term leverage on a pool of assets, and investors just have to think about what asset class they want exposure to," Ricciardi said. "Sometimes it's high yield, sometimes it's investment-grade corporates, and sometimes it's asset-backed securities."
He added that investors need to understand the underlying asset class as much as they need to understand CDO technology.