Ellington Capital Management is preparing to issue its largest-ever collateralized debt obligation as part of its Duke Funding program, according to an official at UBS Securities, which is underwriting the transaction. The CDO also features some structural debuts for Ellington. UBS is currently shopping $700 million in CDO liabilities on behalf of the hedge fund. The notes of Duke Funding VI will be fully funded by a mix of cash structured finance assets with an emphasis on mortgage-related asset-backeds, according to sell-side officials. Larry Penn, managing director at Greenwich, Conn.-based Ellington, did not return a call. Jim Stehli, head of ABS CDOs at UBS, confirmed the transaction but declined further comment.
To sell the large chunk of CDO paper, Ellington is structuring its first-ever money market tranche, a $483 million senior class, which helps it sell such a large amount of liabilities. Previous Ellington transactions under the Duke Funding banner have been in the $300 million range. CDO professionals say more and more collateral managers are incorporating money market tranches into their deals, because the tranches tend to be backed by high-quality assets and they appeal to a new class of investors. At the same time, these structures allow managers to bulk up on the amount of liabilities they can issue and from which they receive management fees (BW, 9/29). "This allows them to lower the liability structure and go up in credit," explains one structurer. He notes the transaction, which is expected to be priced and closed next year, marks something of a reunion for UBS and Ellington, since the former PaineWebber structured and distributed the first incarnation of Duke Funding.