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Derivatives

GSC Tests Hybrid CDO

GSC Partners, a USD10.7 billion New Jersey-based alternative asset management firm, is managing its first hybrid asset-backed collateralized debt obligation.

GSC Partners, a USD10.7 billion New Jersey-based alternative asset management firm, is managing its first hybrid asset-backed collateralized debt obligation. The USD500 million deal, called GSC ABS CDO 2006-2m, consists of 45% credit-default swaps primarily referencing residential mortgage-backed securities and the rest in cash securities.

Ed Steffelin, portfolio manager on the deal, said 2006-2m is the third deal managed by GSC's structured finance group, which was created last year. It follows two previous ABS CDOs issued by GSC and was the second of the three deals to ramp, but closed later because the other two--GSC ABS CDO 2005-1 and GSC ABS CDO 2006-1c--were 100% synthetic. "[Referencing synthetic collateral] allows greater efficiency," Steffelin said. "It allows us to look through the entire universe of securities and skim from the top. With cash deals, you can't do that." GSC will keep active in the cash bond market because not all investors are comfortably with full synthetic structures.

2006-2m was issued by Merrill Lynch and closed last week. The two previous deals were issued by UBS andCitigroup, respectively, and were USD500 million and USD550 million. Steffelin said GSC chooses different counterparties for each deal based on the collateral in the deal and the firm's distribution channels.

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