The U.S. investment arm of a major Dutch lender is ramping up collateral in preparation for a collateralized debt obligation that will feature an innovative structure. Catamount Investment Group, part of NIB Capital Group, is acquiring a mix of structured finance assets and plans to sell $1 billion in CDO liabilities later this year. Howard Hill, managing director, said the CDO will offer a proportional turbo feature that will pay down the capital structure evenly. "We've got a method that gives everyone some early paydown and it's fairer, as opposed to favoring one class over the other," he said. He termed the feature a "geared parallel paydown."
Many CDOs have incorporated features that rapidly pay off certain noteholders in recent years. The mechanism is usually used as a carrot to entice investors to a certain part of the capital structure that may be unattractive at one time or another and to lower the overall cost of the liabilities, said bankers. The structure of Catamount's deal is noteworthy because turboing one class can give short shrift to investors in the other classes and by turboing all classes, all of the liabilities can be sold at more efficient levels. This is particularly important now given how tight spreads in the structured finance and commercial loan market have become, since collateral managers want to keep pushing in liability spreads along with the tight spreads on the underlying assets to ensure there is enough arbitrage.
In particular, Hill said mezzanine investors often get shafted at the expense of senior and subordinate buyers. "Often the mezz gets the middle-child treatment," he said.
Hill declined to reveal exactly how the structure will work, except to say the ratio of turboing will not be based on the principal size of the classes. "We have another method to improve the overall debt service coverage and treat the various classes fairly."
Catamount is in discussions with dealers about underwriting the deal, which would be its first CDO. Hill declined to name the suitors.
