Before joining Deerfield, Roberts was Chief Investment Officer at Liberty Hampshire and several Zurich Insurance Company subsidiaries including Scudder Kemper Investments, Zurich Investment Management and Centre Re.
BW: Four out of your 13 existing collateralized debt obligation deals have been downgraded, including a structured finance one (Mid Ocean CBO 2000), which is a relatively rare occurrence. How do you address investors' concerns, especially when the downgrades were on the senior tranches?
SR: Moody's Investors Service downgraded some tranches just by one notch and we were fairly happy with their approach. The real severe downgrades came from Fitch Ratings and we think it was a little bit ridiculous. The difference, in my opinion, is because Moody's spent a long time with us looking at the underlying collateral and was able to appreciate our pre-emptive investment approach while the same cannot be said about Fitch. Today, we diversify much more. When Mid Ocean was priced, it was backed by 35 to 45 bonds. We now use 85 to 90 different issues for the collateral of our most recent asset-backed securities CDO. To answer the concerns on the senior tranches, you have to take into account that Mid Ocean had a different leverage characteristic than what's in the market, with a smaller equity piece and triple-B buckets.
BW: Some investors criticize your firm for basing the calculation of the manager's fee not on the market value of the collateral but on the principal value. What is your reaction to this?
SR: This is the first we heard of this criticism and we would invite dialogue with anyone that questions it. Having said that, this fee is a small portion of our overall fee. The practice is pretty standard in the industry, which has been confirmed with us by two different dealers we have done deals with. We feel it is inappropriate to characterize Deerfield CDO management fees as different than those in the marketplace.
BW: Describe how your firm is organized in terms of portfolio teams and specialties?
SR: The organization was founded in 1993 by Greg Sachs, who came from Harris Trust. We have four different groups, with three CDO portfolio management teams. Jonathan Trutter, cio, oversees all of them and has a specific expertise with bank loans He heads our bank loan CDO group with six investment pros. The ABS CDO group, with five professionals, is run by Mike McManus. Finally we have the investment-grade CDO group run by Paula Horn, with eight investment professionals. In total outstanding, we've priced five IG CDOs (two of which are synthetic), five collateralized loan obligations and three ABS CDOs. We have a total of $ 6.5 billion in CDO assets under management.
BW: Your shop has an investment philosophy known for smaller CDO deal size and long ramp-up periods. Explain why and describe your investment style in general.
SR: We really take the time to gather collateral. Our average ramp-up period before closing an ABS deal is eight to 12 months versus two to four months in the industry. And yes, we like smaller sized deals: our typical loan deal is $300 million. We've been asked to do bigger deals and we've said no. We don't want to be forced to buy collateral we are not comfortable with.
BW: Any interest in originating alternative CDOs such as collateralized fund obligations, or private equity CDOs?
SR: We like plain vanilla collateral and focus on IG, ABS and bank loans, as we want to have as much liquidity as possible. The only way we would expand into a new CDO asset class would be if we brought a new team altogether and we have no plan on doing so at this time. However, we've talked to a few fund-of-fund managers about using our hedge funds for the underlying collateral of a CFO.
BW: Any sectors that you would stay away from in your collateral purchases?
SR: We would not purchase aircraft leases, mutual fund fees or future claims receivables such as tobacco bonds. We would consider buying manufacturing housing or franchise loans but only for tranches rated double-A or higher.