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Derivatives

U.S. Manager Revisits Synthetic CDO

Vertical Capital, a USD5 billion structured finance asset manager partly owned by Bank of America, is issuing a second tap of its first synthetic collateralized debt obligation.

Vertical Capital, a USD5 billion structured finance asset manager partly owned by Bank of America, is issuing a second tap of its first synthetic collateralized debt obligation. The USD500 million deal, called Vertical ABS CDO 2006-2, will consist of 100% credit default-swaps on primarily sub-prime residential mortgage-backed securities when it closes June 20, but will allow for up to 10% cash collateral for greater flexibility. 2006-2 follows closely on the manager's first hybrid, Vertical ABS CDO 2006-1 (DW, 5/26), which consisted of 70% credit-default swaps on sub-prime RMBS.

"2006-1 was oversubscribed up and down the capital structure," said James Stehli, managing director and head of the global CDO group at UBS in New York, which arranged both deals. Stehli said the decision to issue a second deal so soon after the first partly was to satisfy demand, and also to take advantage of favorable spread-widening market conditions.

Using synthetic collateral similar to the previous deal allowed a ramp in just 29 days. "It wasn't a race," Stehli said. "But, it shows how quickly you can do a synthetic deal now. When the investors are lined up and you don't have to do a road show, you can ramp incredibly fast."

Brett Graham, portfolio manager in New York, was traveling and did not return phone calls.

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