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Soros, Cargill Reportedly Dip Into Secondary CDOs

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Soros Fund Management and Cargill Investor Services are bidding for collateralized debt obligations in the secondary market, traders say. The overtures are significant because CDO trading has been predominantly dealer driven, and participation from so-called smart money accounts bodes well for market support and secondary flows.

An assistant to Jacob Goldfield, cio at Soros, referred calls to Michael Vachon, a firm spokesman. He said Soros was "not prepared to comment on its business affairs." Bill Brady, a spokesman for Cargill Investor Services, did not return a call.

"Hedge funds are the fastest-growing investor base," says Brian Wargon, senior v.p. and head of CDO trading at Lehman Brothers, noting that he has seen hedge funds entering the secondary market. He declined to reveal specific names. "They have the structural expertise since a lot of them come from the banking side and they have the ability to move quickly," he says. Wargon adds that hedge funds are less concerned with ratings than traditional investors.

Larry Penn, managing director at hedge fund Ellington Capital Management, which has acted as a collateral manager of CDOs but has not yet bought deals from other managers, says his firm is eyeing the market. It "makes a lot of sense" that hedge funds are increasing their CDO activity, because they are natural buyers of distressed senior CDOs and have the expertise to break down CDOs, he says, adding, "There's not a lot of buyers for paper like that because it takes a lot of analysis."

Traders say that while there are still opportunities for hedge funds such as Soros and Cargill, they note that assets are not trading as cheaply as they were a few months ago.

Secondary CDO trading--once considered an oxymoron--has picked up dramatically this year, spurred by Pacific Investment Management's well-publicized liquidation of Abbey National's CDO portfolio (BW, 6/13). One trader at a large CDO underwriter confirms Soros and Cargill have shown interest in senior, non payment-in-kind securities, but submitted bids that were too low.

One trader adds that a senior high-yield CDO that was trading at a 17% discount to its underlying collateral a few months back is now trading only 8% cheaper. He adds Cargill is rumored to have acquired some CDO paper recently, while Soros has yet to pull the trigger. --Scott Goodwin

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