Citibank shopped a $125 million basket of approximately 47 loans last week, in what investors said is a growing phenomenon in the market for large portfolio trades. As first reported on LMW's Web site last week, the portfolio had an average spread of LIBOR plus 290 basis points and contained mostly flow names such as Allied Waste, Alaris Medical Systems and Charter Communications. It could not be determined whether the portfolio was snapped up last week.
Citibank has put together numerous auctions and trades of this type in the last few months and is said to be the most significant player, though other desks, including Banc of America Securities and J.P. Morgan have put together similar packages.
"The need for portfolio trades arises from managers ramping up, including a number of deals originated in our own CDO pipeline," explained Jonathan Calder, managing director of loan sales and trading at Citi. "It's a cyclical phenomenon caused by cash flowing into the asset class. But that will continue for some time."
One banker explained the demand is coming from the massive supply needs of the prime-rate funds, closed-end funds, total rate of return swap accounts and collateralized loan obligations that are in ramp-up mode. "The advantage is that we provide the manager with a large diversified portfolio in one trade. What used to take weeks or more we can now do in a couple of days," stated Calder. This is especially important for some of the prime rate funds, which "can buy to get the leverage going," added one investor. He said the large portfolio deal is a great mechanism because the buyer can then sell away the loans it does not want. Furthermore, by throwing in a mix of stressed names and revolvers--credits that trade at a discount--the price can be moved down for the overall portfolio, offering some upside.
But the trades, which most often sell through auctions, do not suit everybody. One CLO manager said his firm has not ploughed too far into the area as they are not looking to compete against everybody. "You get into a bidding war. Then prices are more egregious," he noted. Also, though CLOs managed by his firm are cash-rich, there is not room to accommodate a $100 million plus portfolio. Calder agreed that though the auctions can be useful to demonstrate price discovery and liquidity, they can get expensive. He added though that Citi can put together tailored portfolios at a lower cost. One portfolio manager backed this up by noting, there is sometimes an "all or nothing trade," but there is also a "what do you need trade," he stated.
Calder noted that Citi needed to develop the technology required to do this, but he declined to elaborate on how it works. One banker speculated that Citi was either using synthetics or selling these from its own gargantuan balance sheet. The reasoning is that it is difficult to source the paper in a market where there are few sellers. Calder also would not comment on what other desks were doing, but he said the bank is capable of doing this in part through technology and partly because "we are known as a place that can put portfolios together quite quickly."