Citigroup Global Markets and Wachovia Securities are among the banks in the process of setting up dedicated portfolios that would purchase equity classes of collateralized debt obligations, according to Bond Week, an LMW sister publication. According to several structured finance professionals, this will be in a mutual fund format. The funds would presumably be set up to provide a natural buyer for the firms to sell equity tranches, which as the riskiest part of the capital structure are often hard to place, on the CDOs they structure and act as lead manager on. "Everyone's dream is to have a big fund with money for equity so they can sell a CDO whenever they want," said a researcher familiar with the plans. Investment banks often retain the bonds they cannot sell.
Citigroup is aligning itself with David L. Babson & Co., a prominent CDO manager, to lend collateral manager expertise to the venture, according to one head of CDO structuring at a rival bank. Janice Warne, co-head of the CDO group at Citgroup, and Drew Dickey, her counterpart at David L. Babson, did not return calls by press time. The alliance is similar to one OppenheimerFunds and Merrill Lynch are said to have entered, also in an effort to create a fund that would allow the bank to easier distribute equity classes. Jim Pierpoint, a Wachovia spokesman, declined to comment.