Who would have thought that, over the last 12 months, more than $300 million in subordinate, double-B and triple-B asset-backed bonds were traded on an island off the coast of Miami?

United Capital Markets, a brokerage/dealer located on Miami's Key Biscayne, is a one-man shop dealing exclusively in the secondary market, with a focus on subordinate, illiquid ABS bonds.

Specifically, UCM trades home-equity ABS, primarily high-loan-to-value. UCM also trades a small percentage of mortgage-backed securities and commercial mortgage-backed securities, said owner/trader John Devaney.

Devaney started UCM last March, leaving another regional dealer, Capital International Securities, where he was a minority partner. At CIS, Devaney had been running the fixed-income trading desk since 1994.

"I decided to leave Capital to buy my own firm, and left a sales force to focus specifically on subordinate bonds, which take a fair amount of time and studying," Devaney said. "And it's been lucrative."

Before CIS, Devaney worked at Suncoast Capital, another regional brokerage in Florida.

"Some people think that Manhattan is the perfect place for being in finance," Devaney said. "I think I'm in the perfect spot. I work on an island, own a company yacht, and when my clients, or other traders from other dealers are in town, I can take them fishing, and we can hang out in the tropics."

High-LTV Concentration

Devaney is currently running 40 accounts, with a client base that runs the gamut: hedge funds, insurance companies, banks, and money managers.

What brings him business is his specialization, Devaney said.

"I focus on illiquid bonds, which are hard to trade because they're complex," Devaney said. "More importantly, with a lot of these accounts, you can't just say, I can sell you these bonds here, or I can bid those bonds there.' The clients want to know what's really going on."

Because of the turmoil the high-LTV sector has suffered - the peak being the bankruptcy of FirstPlus Financial, which was the primary issuer of high-LTV paper just two years back - high-LTV has been especially price-sensitive. For example, one triple-B high-LTV bond could trade at 550 basis points over the mark, while another could trade at 800.

As most new issuance began in 1997, high-LTV product was not actively trading in the secondary market until 1998. Devaney's two years of concentration on high-LTV subordinates encompasses the life of the market, he said.

"I've traded and researched a lot of the deals out there and I've got a good feel for them," he said.

It's been a good year so far for high-LTV product, Devaney said, where triple-B's and single-A's have tightened 100 to 200 points.

With just a few new high-LTV issues so far this year, light volume in the primary market could have helped drive demand into the secondary market.

"Many people have said that spreads in high-LTV subs have come in only because of the CBO bid," Devaney said. "I don't believe that's true. In March I traded $40 million in high-LTV triple-B and none of the bonds went to CBOs. They went to accounts that see the relative value."

From a stress model point of view, compared to regular home equity, high-LTV bonds hold up to higher default rates, Devaney argues.

"They're a little more elastic overtime," he said. "They can withstand high defaults and then recover, whereas in regular home-equity, very high defaults can result in immediate downgrades or principal loss."

Generally, ratings agencies require higher over-collateralization levels for high-LTV transactions.

Putting It All On the Line

In the last twelve months, Devaney said he traded between $350 million and $375 million in bonds, 75% of which were in subordinates. In March, UCM traded $70 million, primarily ABS product. In the company's most active month, $110 million in bonds moved through its books.

"I carry up to $10 million in subordinates at any one time," Devaney said. "Ten million in subs isn't anything to sneeze at."

At presstime, UCM was holding about $6 million in double-B FirstPlus paper.

With just $2 million in net capital, which can then be leveraged for $10 million in bonds, UCM has a lot at stake, Devaney said.

"I'm making bets with 100% of my own money," Devaney added. "A lot of people respect that, because when I say, all right, I own this and I think it's a good deal,' people say, this guy's got a lot on the line, maybe I'll take a look at it.'"

Business is good, Devaney said. Over the next year, he plans to add another trader or two, and perhaps build a small sales team. His office is his house, and, while Devaney is making trades, there's a parrot squawking in the background.

"In the beginning, a lot of the primary broker/dealer banks were annoyed by me because I was taking business from some of their accounts," he said. "Since then, a lot of the traders and I have become friends - there is plenty of business to go around."

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