GLC Institute: Collateralized Debt Obligations
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GLC Institute: Collateralized Debt Obligations GLC Institute: Collateralized Debt Obligations Presentation Transcript

  • GLG Institute Presentation Collateralized Debt Obligations Jim Finkel CEO, Dynamic Credit Partners
    • About GLG Institute
    • GLG Institute (GLGi SM ) is a professional organization focused on educating business and investment professionals through in-person meetings. It is designed to revolutionize the professional education market by putting the power of programming into the hands of the GLG community.
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    • Gerson Lehrman Group Contacts
    • Kylie Wright-Ford
    • Senior Vice President
    • Gerson Lehrman Group
    • 850 Third Avenue, 9th Floor
    • New York, NY 10022
    • 212-750-4612
    • [email_address]
    • Christine Ruane
    • Senior Product Manager
    • Gerson Lehrman Group
    • 850 Third Avenue, 9th Floor
    • New York, NY 10022
    • 212-984-8505
    • [email_address]
    • IMPORTANT GLG INSTITUTE DISCLAIMER – By making contact with this/these Council Members and participating in this event, you specifically acknowledge, understand and agree that you must not seek out material non-public or confidential information from Council Members. You understand and agree that the information and material provided by Council Members is provided for your own insight and educational purposes and may not be redistributed or displayed in any form without the prior written consent of Gerson Lehrman Group. You agree to keep the material provided by Council Members for this event and the business information of Gerson Lehrman Group, including information about Council Members, confidential until such information becomes known to the public generally and except to the extent that disclosure may be required by law, regulation or legal process. You must respect any agreements they may have and understand the Council Members may be constrained by obligations or agreements in their ability to consult on certain topics and answer certain questions. Please note that Council Members do not provide investment advice, nor do they provide professional opinions. Council Members who are lawyers do not provide legal advice and no attorney-client relationship is established from their participation in this project.
    • You acknowledge and agree that Gerson Lehrman Group does not screen and is not responsible for the content of materials produced by Council Members. You understand and agree that you will not hold Council Members or Gerson Lehrman Group liable for the accuracy or completeness of the information provided to you by the Council Members. You acknowledge and agree that Gerson Lehrman Group shall have no liability whatsoever arising from your attendance at the event or the actions or omissions of Council Members including, but not limited to claims by third parties relating to the actions or omissions of Council Members, and you agree to release Gerson Lehrman Group from any and all claims for lost profits and liabilities that result from your participation in this event or the information provided by Council Members, regardless of whether or not such liability arises is based in tort, contract, strict liability or otherwise. You acknowledge and agree that Gerson Lehrman Group shall not be liable for any incidental, consequential, punitive or special damages, or any other indirect damages, even if advised of the possibility of such damages arising from your attendance at the event or use of the information provided at this event.
    • Council Member Biography
    • Jim Finkel is the co-founder and Chief Executive Officer of Dynamic Credit Partners. Mr. Finkel and his team compile collateralized debt obligation (CDO) packages for investors; specializing in bond portfolios (CBOs) and hedge funds. He is primarily responsible for sourcing investment opportunities, risk management, marketing and compliance. Mr. Finkel has over 20 years experience in the area of structured finance and has transacted in CDOs since 1996. Previously, he was Managing Director of the European CDO team at Deutsche Bank in London. Prior to DB, Mr. Finkel was in the structured products/derivatives group at Bear Stearns in both London and New York (1996-2000). He also has significant mortgage-backed and asset backed experience from his first trading desk position with Nomura Securities in 1992-1994.
    • Agenda
    • Components of a CDO
    • Developments in the CDO Market
    • Current Market Dynamics
    • Asset Class Comparison
  • First Thing-Let’s Kill all the Journalists “ Sound Credit Tool Or Toxic Waste?” Applied Derivatives, December, 2004 “ A Ticking Time Bomb?” The legacy of the early days of the synthetic collateralized debt obligations market could be a painful future for many of the institutions involved. Risk Magazine , October 2004 “ Are Derivatives Weapons Of Mass Financial Destruction?” Is a Meltdown Cooking in Exotic Assets, Or Can Markets Handle the Next LTCM? …Warren Buffett warned that the global financial system was held hostage to ticking "time bombs" and at risk of a "megacatastrophe.“ Financial Times, May 2006 “ A scandal waiting to happen?” Tuesday, 26 February, 2002, BBC News, referencing CDOs as the next Enron “ The Toxic Avenger” Collateralized debt obligations raise capital for junk-rated borrowers. CFO.com , January, 2002 The Poison in Your Pension “ As the $503 billion-a-year CDO market thrives, CDO marketers like Bear Stearns and Citigroup find buyers for the portions known as toxic waste, the equity tranches.” Bloomberg Markets , July 2007 “ Structured finance CDO—not cash on delivery” Structured finance can bring unstructured losses…. The chairman of American Express, Kenneth Chenault, was man enough to admit last week that his outfit “did not fully comprehend” the risk underlying a portfolio of whizz-bang investments known as CDOs. The Economist , July 2001 “ Barclay’s ‘Toxic Waste’ Row with German Bank Settled” Barclays had settled a high profile dispute with a German bank which was claiming $150m to cover its losses in financial instruments which have been described by regulators as “toxic waste” The Guardian , February, 2005 “ Invest at the Point of Maximum Pessimism” Sir John Templeton Collateral Debt Obligations: Complex and Risky - Yet Popular Financial Times , November 2004
  • Example of a Typical Cash Flow CDO Structure All in “ cost of funds” 6 % 12% of Capital Structure Yield = 8% ASSETS DEBT LIABILITIES & EQUITY 2 % Excess Spread 88% of Capital Structure MBS (Mortgage-Backed Securities) Bonds Bank Loans Middle Market Loans Emerging Market Debt ABS (Asset-Backed Securities) MBS (Mortgage-Backed Securities) Ongoing Junior Management Fees Arranging Bank Upfront Fees and Ongoing Senior Management Fees Upfront Deal Expenses (Legal/Rating Agency/Accounting) Ongoing Administrative Expenses Equity Tranche 12% Equity = 8x leverage 8x leverage of 2% excess spread = 16% projected IRR Mezzanine Notes : A through BB rated Bearing coupons of LIBOR + 100 - 1100 Senior Notes : Aaa/AAA to AA rated Bearing coupons of LIBOR + 25 - 80
  • Ramp Up Reinvestment Amortization Closing What Does A CDO Manager Do ? Year 1 Redemption Right at Year 3 Year 4-5 Year 8-10 Auction Call at Year 8-10 Year 12 Final Legal Maturity Stages in the Life of a CDO
  • Development of the CDO Market HY Credit defaults of 2001/2002 take their toll Evolution of ‘synthetic’ CDOs from the credit default swap markets CDO underlying assets classes converge on more stable, secured assets (leveraged loans, ABS) Market reaches tightest spread levels ever Issuance volume hits record levels Efficiencies via enhanced competition and lower fees 2002 2003 2004 2005 1996 1997 1998 1999 2000 Rating Agencies Issue CDO Criteria 2006 2001 CDO Manager growth, consolidation and personnel shifting Secondary market develops 2007 Shift in issuance away from HY/EM; beginnings of ABS CDOs in US Subprime woes cause market to correct CDO Timeline
  • Market Snapshot: Volume and Issuance Breakdown Source: JP Morgan May 2007 YTD $ Billion
  • Growth of ABS CDO Issuance Source: JPMorgan As of 5/14/2007
  • Source: JPMorgan Leveraged Loan Spreads and CLO Issuance Volume
  • Covenant-Lite Loans
    • Euro CLOs currently have lower funding costs and more stable asset spreads than US CLOs.
    • This translates into higher equity returns
    Source: JP Morgan Estimated CLO Equity Returns* US and Euro CLO Equity Returns * Hypothetical returns based on the cost of liabilities and asset spreads. Does not reflect actual returns. IRR %
  • Alpha Generation through Trading CDOs
  • Dynamic Credit Partners, LLC
  • Evolution of Dynamic Credit Partners
    • each backed by a portfolio of (AAA to A) ABS and CDO debt tranches
    • each backed by a portfolio of mezzanine CDO debt tranches
    • opportunistic, value–orientated investments in subordinated debt of CDOs and ABS, as well as proprietary risk-sharing trades
    Stockbridge CDO CDO^2 $250mm Closed - November 2004 Lenox CDO Hybrid CDO^2 $255mm Closed - December 2005 Sheffield CDO CLO^2 $307mm Closed - April 2006 Sheffield II CDO* Hybrid CLO^2 $325mm Closed - December 2006 Magnolia 2006-11 CDO $40mm Closed - December 2006 Magnolia 2007-1 CDO $40mm Closed - March 2006 DCOF II $88.99mm Launched - August 2005 Open ESE Funding $75-150mm Launched - December 2005 Open to DCOF II Investors Barrington CDO $1,000mm Closed - December 2005 Monterey CDO $1,002mm Closed - March 2006 Barrington II CDO $1,763mm Closed - May 2007 DCOF I $30.9mm Launched - March 2004 Terminated – December 2005
    • both referencing a portfolio of BBB rated or higher CDO tranches
    Dalton CDO Long/Short ABS CDO^2 $400mm Priced - May 2007 Investment Products CDO^2s HG ABS CDOs Bespoke CDOs Structured Credit Funds *Nominated for 2006 CDO of the Year by US Securitization Awards
  • Organization - Chart Daniel Nigro Trader/Portfolio Manager Chris Sandleitner ABS Analyst Mendel Starkman Senior CDO Analyst Dov Warman CDO Analyst Deo Sabino CDO Trader/Analyst Aniket Deshpande CDO Analyst David Schwartz, CFA Trader/Portfolio Manager Sam Haddad CDO Analyst CDO Team ABS Team Jim Finkel CEO Tonko Gast CIO Lauren Wright Mark Salama Marketing & Investor Relations General Counsel Edward H. Benton, Esq. Sumeet Sablok ABS/CDO Intern David Goldweitz CMBS Analyst Lily Miao Marketing Intern Eugene Shklyar Generalist Programmer Steve Pennington Quantitative Systems Pamela Byrd Database Development And Programming Systems & Analytics John Gallo Systems Administrator Jing Lu Quantitative Developer Andrew Ragone Programmer Andrew Wax Chief Operating Officer/ Chief Compliance Officer Ashley Montgomery Controller/ Investor Support Karen Llopiz Executive Assistant Administration Andrea Kollmorgen CDO Support Analyst David Lee CDO Surveillance/ Opportunities Fund Support Chris Hughes CDO/ABS Trade Support Operations
    • DCOF II is a structured credit opportunities fund that primarily invests in subordinated CDO and ABS tranches in the secondary market.
    • Dynamic specializes in analyzing these complex structured credit securities, where mispricings are more prone to occur.
    • Dynamic is able to exploit these opportunities through its proprietary analytics, its disciplined approach to measuring risk/ reward, and market access due to deep relationships.
    • Dynamic expects to generate annual returns for DCOF II in the low to mid-teens while placing paramount importance on the preservation of capital.
    • 2x Maximum leverage; current leverage only 10% of NAV
    • 1-year and 3-year lockup classes, bearing 2/20% and 1/15% fee structures, respectively.
    • Administrator- Meridian Fund Services (NY & Bermuda)
    • Prime Broker- Bear Stearns & Co., Inc.
    DCOF II – Info and Performance DCOF I (Predecessor Fund) launched in March 2004 and was liquidated December 2005 DCOF I Total Return: 20.4% net IRR since inception Disclaimer: This document does not constitute an offer to sell or buy any securities and may not be relied upon in connection with any offer to sell or buy securities. Any such offer will be made only to qualified investors by means of the Fund’s Confidential Private Placement Memorandum and Subscription Document, which should be reviewed carefully prior to investing. An investment in the Fund is speculative and may involve a high degree of risk. This is not intended for public use or distribution. Past performance is not indicative of future returns . *As the Sharpe Ratio is based on a very small data set, its interpretation as a performance measure requires caution 49 positions of the 56 in the portfolio have an aggregate of approximately 5,500 underlying credits 13.06% Last 12 Month Return $88.99 million AUM as of June 1, 2007 2.68 Annualized Sharpe Ratio* 24.09% Cumulative Return 3.47% Year to Date Return 0.99% Average Monthly Return C Share Class DCOF II Performance Summary