Deutsche Bank has set up a global credit arbitrage investment arm that will scour the market for fixed-income securities and then either repackage or keep them on its balance sheet. The firm, dubbed Winchester Capital Principal Finance after its address at Great Winchester Street, London, could have a balance sheet topping hundreds of millions of dollars, according to market officials. Deutsche Bank decided to set this up now because the CDO market has reached a size where it makes sense to have an independent entity investing in different CDOs, according to market officials. Another official speculated that Deutsche Bank had not turned its attention to this before because it was making so much money from its structuring desk, however, now that CDOs are becoming harder to shift and margins are decreasing, it is looking for new opportunities.
CDO structurers said this can only be a good thing, especially as Winchester Principal Finance would retain many of the deals. That Deutsche Bank is putting its weight behind the project is demonstrated in the staffers it has chosen to run the firm: Scott Eaton was head of integrated credit trading for Europe and Alex Graham was co-head of credit structuring in London. Both Eaton and Graham declined comment.
It was necessary to set up a standalone firm with Chinese Walls separating it from the main bank so that it could have full access to both potential investments and distribution channels, said the market official.
Winchester Principal Finance will invest in any structured credit obligation backed by revenue streams, including cash and synthetic collateralized debt obligations, mortgage-backed securities and traditional asset-backed securities. CDO houses have been finding both junior mezzanine and super senior tranches increasingly hard to shift as many of the blind pool CDOs created in the last several years have blown up. According to a recent Credit Suisse First Boston report 100% of synthetic CDOs issued in 1997 have been downgraded. However, Winchester Principal Finance will focus on the low risk end of the spectrum and by having access to the whole market will not have to fill deals with the "dogs of the desks."
