Marathon Asset Management is structuring an innovative collateralized debt obligation that can change its investments at any time in almost any asset class, enabling a hedge-fund like strategy within a CDO structure. This is the first CDO from Marathon, set up in 1997 by Bruce Richards and Louis Hanover, who previously ran trading groups at Smith Barney. Since then, the firm has set up several distressed debt and credit hedge funds that trade non-investment grade securities globally.
Marathon Structured Funding I LLC is a $500 million cash flow deal and is expected to invest in leveraged loans, corporate bonds and structured finance assets. But it can alter its capital structure over time to invest in different asset types with no fixed proportions, explained Ling Yu, a director within Standard & Poor's structured finance division.
Importantly, there is no defined mix of what the assets should be. "This will enable Marathon to invest in different markets based on opportunities," Yu said. To enable this investment style the capital structure is dynamic with the manager needing to adjust the equity component based off the collateral to be purchased. "Unlike most cash flow CDOs, this deal will issue the notes when the assets and opportunity are there. They will inject the equity, buy the assets and then issue the notes," she explained.
Depending on the type of assets used, a higher or lower level of equity investment is required. The deal has a 10-year reinvestment period and instead of having a ramp-up period, the manager will issue notes on a when-required basis. This means that the spread, weighted average life and the amortization schedule can change through the reinvestment period due to the changing collateral mix.
The deal is also unusual since it will use the repo market in combination with term investors to fund itself. Marathon is not only forming Marathon Structured Funding I LLC but also a parent company called MSF Holdco. The parent of the "AAA" note issuing entity will engage in the repo transactions. Officials at Marathon and underwriter Merrill Lynch declined comment.
