Ricciardi joined Merrill early last year from Credit Suisse First Boston. He is a managing director and head of the global structured credit products group. He has quickly helped Merrill move up the collateralized debt obligation underwriting league tables. From a minor presence in 2002, Merrill finished third in U.S. underwriting last year and first on a global basis, according to third-party data.
What new asset classes do you see emerging in the CDO world now that leveraged loan and asset-backed CDOs are so common?
It's harder to find new asset classes. I still consider trust preferreds new and there are a lot of variations in that asset class that are new, even though there have only been a handful of those deals done. Real estate investment trust preferreds are also possible. Other than that, a lot of people are trying to put municipal bonds into CDOs, and that would be well worth our effort because it's a trillion dollar market and there's a lot of interest from investors. People flirt with different areas like private equity and hedge funds but I am not so sure how big a business those can be.
Speaking of trust preferred CDOs, they are still unseasoned and the deferral option that the underlying borrowers have hasn't been fully tested. What can you say to investors who may be wary of this asset class?
The deferral options exist, clearly, and that's one of the reasons it gets Tier One capital treatment. There's really no way to avoid having it. Ultimately, investors need to make an assessment as to whether the banks in the portfolio are likely to use the deferral option. Most people are comfortable that in the current environment, a deferral is unlikely because banks are healthy and they attract a lot of regulatory scrutiny. Yes, it's a risk, and it's indicative of credit risk. I think people have been comfortable with the credit risk of banks and for the most part the Federal Reserve has indicated that banks are as strong as they have ever been.
What kind of investors participate in the CDOs you underwrite? Are you seeing traditional buyers or more smart money accounts?
The buyer base is all over and everywhere. Retail investors can't buy CDOs because they are private placements, but apart from them, banks, insurance companies, pensions and endowments are all participating. Two things were notable last year. Some buyers who were previously on the sidelines, such as some of the insurance companies, got back in the market. They realized they were unhappy with the performance of some of the early vintage high-yield deals and the liquidity, and both of those issues have been addressed--we don't put high yield into CDOs any more and liquidity has increased. And, the other major trend as far as investors go is there are a lot of new investors. There are a lot of hedge funds that popped up last year to take advantage of the opportunities in CDOs, such as sell-side Wall Street guys who started hedge funds or credit guys who started to look at it. It's been a huge boom.
How does the increase in liquidity affect origination efforts?
It is a tremendous help on origination side. Investors feel more comfortable in the product because they know they can get out when they want to. People felt there was less liquidity than in some other products and now that's not the case. It's not Treasuries, but it's as reasonable liquidity for a securitization product as you would expect.
You joined Merrill about a year ago and the firm has had a lot of success in originating new CDOs. How have you done this?
We have a particular philosophy toward doing the business that has proven to be successful. Merrill had a good foundation for a good CDO business and just needed to pull some things together. For example, they had very broad distribution, which is always very helpful. And, they were in all of the asset classes that go into CDOs. They had a basic foundation and just needed a jumpstart.
Tell us about the CDO origination team. How is it set up?
We have origination and structuring groups in New York, Tokyo and London. And, we have marketing groups in Tokyo, Hong Kong and London. And then we have direct sales groups all over, but a dedicated direct sales group in New York. We specialize a little--it's more by underlying asset type in New York and elsewhere it's more general. Vincent Dahinden heads all the products in London.
How would you rate your progress as a co-chair of the Bond Market Association's CDO committee?
The BMA is a long-term work in progress, but it's been encouraging to see competitors come together and put their issues aside. It's been good for the market. And, even though it's been a short time since the committee was created, there's been a lot done and opening the communication has helped and investors are more comfortable as a result.
Who will win this year's Super Bowl? (Editor's note: this interview was conducted prior to yesterday's game).
I'm going with the Patriots.