Vertical Capital, a USD4.5 billion structured finance asset manager part-owned by Bank of America, is managing its first hybrid collateralized debt obligation. The USD775 million deal, called Vertical ABS CDO 2006-1, consists of 70% credit-default swaps referencing primarily sub-prime residential mortgage-backed securities and the rest in cash securities.
"The whole market is moving toward hybrid synthetic deals," said Brett Graham, portfolio manager in New York. "You almost couldn't fathom doing a pure cash deal anymore in the RMBS market."
Vertical is able to trade 15% of the collateral per year during the four-year revolving period. It can sell credit-risk securities to avoid potential defaults and mitigate losses in a high-default-rate environment, or sell credit-improved securities to capture capital gains. Premium payments for the short bucket are paid out of management fees rather than the interest waterfall to mitigate investor concerns about diversion of interest to short positions. "We wanted to diffuse that off the bat by paying out of the management fee," Graham said.
Vertical's second hybrid, called Vertical ABS CDO 2006-2, will close next month. Graham declined all comment on that deal. Officials at UBS, which structured the deals, could not immediately be reached.
