At this year's ABS West 2005 conference, United Capital Markets president John Devaney outlined his firm's expansion plans in the coming 12 to 24 months, although few of the chattering conference attendees were listening. Following the recent hiring of CFO Linda Hannan and last week's poaching of secondary trader Randall White, Devaney is ready to execute his strategy, which includes investment banking activity, publishing research and raising funds in the capital markets - selling both debt and equity - as well as a move into high-yield corporate trading.
"I want UCM to be on the level of Bear Stearns and [RBS] Greenwich [Capital]," Devaney said in an interview last week. "We're going to catch up to those guys, it's only a matter of time."
UCM's first objective is to enlist an executive management team in order to be Sarbanes-Oxley compliant ahead of its entry into the capital markets. UCM hired Hannan last month (see ASR 1/24/05) to be its CFO, and plans on hiring a treasurer, chief operating officer, chief investment officer and controller within the next three months. UCM also recently retained Ernst & Young as its independent auditor.
UCM has also recently launched information technology and human resources departments and added a hire to its marketing department, which currently equals the size of UCM's three-man trading desk.
Once all the pieces are in place, its inaugural debt issuance will not be far behind.
While it is unclear at this point whether UCM will bring a private placement or an investment-grade bond placed with a small number of counterparties, Devaney hopes to raise $100 million to $200 million with the transaction. Proceeds of the offering will go to bolster the trading operations, as well as to make new hires to expand the firm further. With its IPO, currently just in the discussion phase, Devaney was eyeing an additional $500 million to fund future growth.
Among the areas Devaney would like to expand into is investment banking. UCM has already issued and underwritten its own SBA loan-backed transaction and acted as co-manager on an offering for E*Trade Global Asset Management. Devaney also claims to be close to landing another co-manager role, which he reports will be announced sometime this week.
To break into this business, UCM plans to use the same strategy it did as a start up broker-dealer in 1999 - go long. "Many investment banks can't say with a straight face that they'd buy the product they are selling," added Devaney. "UCM will get into investment banking by taking down all the subs, as we did in our role in the E*Trade CDO where we bought 50% of the equity and the subs."
Devaney claims that UCM initially offered to own 75% of the first-loss pieces in that trade and would only do business with issuers or collateral managers in which it is willing to own all of it. "In investment banking business that we do, both UCM and John Devaney are going to buy the riskiest classes and waving the wand of doing principal should land us business. UCM could eventually turn investment banking on its ear."
Devaney maintains that due to the Street's current risk appetite, banks will line up to do business with UCM - one underwriter, Merrill Lynch (lead manager on the E*Trade deal) - already has, he noted. The added potential of underwriting a debt offering, syndicating a loan or leading an IPO for UCM should also help facilitate relationships with the Street.
As an issuer, UCM plans in the near term to issue its first static-pool CDO, backed by a mix of investment-grade and high-yield bonds. This will be done "partly to gain a track record as a collateral manager and consult CDO asset managers," down the road. UCM plans to retain the equity on its CDO offering.
UCM is reportedly working with monoline guarantors to issue an aircraft pooled lease re-remic, although these plans are for further in the future and may lead to an additional two to three hires to maintain programmatic issuance in this sector. Additionally, UCM has begun discussions with specialty mortgage originators to lead small high LTV home equity ABS transactions, hopefully by next year.
Other positions UCM plans to add are a CMBS subordinate bond trader, a trader to focus on jumbo and Alt-A residential MBS, and a "special situation" high-yield debt trader and analyst in order to trade speculative-grade bonds and leveraged loans as well. In research, UCM would like to eventually hire two to three more analysts and "publish research on secondary markets in all the sectors UCM trades," Devaney added.
UCM grossed $70 million in revenue last year, according to Devaney, with $40 million in net revenue. These numbers are down slightly from 2003, when it grossed $135 million, netting $110 million. The decline is attributed to Devaney's strategic planning focus, which took him away from his trading duties. "Revenue declined, but volume traded and new accounts each increased," he said. Currently UCM reportedly has 500 institutional accounts and 500 more prospective clients, many of which Devaney claims call him seeking to do business with his firm.
He chalks this up to his fundamental strategy of leaving "a little meat on the bone" for his "downstream clients." Devaney doesn't deny profiting on many of his trades, but adds that he aims for a "business that provides well above average returns" for clients, a strategy he plans to carry over into UCM's own capital markets offerings. For example, should UCM tap the debt markets this year Devaney says it would offer an above-market yield and that he has no problem "leaving 10 [basis] points on the table."
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