Structured Finance Advisors, one of the industry's earliest CDO pioneers, is soliciting equity buyers for a $1 billion high-grade ABS CDO that it is putting together.
The unusual deal taps mostly high quality ABS assets, which carry mainly AA-' as well as triple-A and single-A ratings.
"We have a very sound transaction that is conservatively put together," said Joe Lorusso, president of Structured Finance Advisors. Noting uncertainty in the underlying housing market that is currently driving demand for mezzanine mortgage ABS, he added: "We're looking to be even on the conservative side. We don't think mezzanine is the place to be right now."
A homecoming
Perhaps that explains why the company has been flying beneath the radar for the last several years.
The move also marks a homecoming of sorts for Structured Finance Advisors. The last time that the Farmington, Conn.-based company completed a deal was back in 2002. Since then, Lorusso said, the company has been focused on managing its billion-dollar portfolio.
"Perhaps we should have kept going in ABS CDOs, but we were just managing what we had," Lorusso said. "Now I feel: let's go back in.' Double-As are a good place to be."
Structured Finance Advisors is hoping that the deal's underlying assets will appeal to hedge funds, and insurance institutions, among other investors, Lorusso said. Because of the leverage afforded to high-grade assets, the company expects to offer an internal rate of return in the mid-teens.
The company also has the option of going to a banker or another cash-rich investor to finance the equity portion. If such an investor contributes 40% to 50%, a move like that could reward investors with an IRR well into the 20s.
"We got in early in the ABS CDO cycle, and we want to go back in being a high-grade issuer," Lorusso said.
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