Citigroup Global Markets and Wachovia Securities are in the process of setting up dedicated portfolios that would purchase equity classes of collateralized debt obligations in a mutual fund format, according to several structured finance professionals. The funds would presumably be set up to provide a natural buyer for the firms to sell equity tranches on the CDOs they structure and lead manage. Those tranches are the riskiest part of the capital structure and often hardest to sell. "Everyone's dream is to have a big fund with money for equity so they can sell a CDO whenever they want," says a researcher familiar with the initiatives to set up the funds. Investment banks often retain the bonds they can't sell.
Citigroup is aligning itself with David L. Babson & Co., a prominent CDO manager which will 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 Citi-David L. Babson 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 Merrill to easier distribute equity classes (BW, 12/1). It could not be determined if Wachovia is teaming up with a collateral manager as well. Wachovia's venture will likely focus on equity slices of real estate CDOs, since that has been where it has been most active as an underwriter, according to one rating agency official familiar with the plans. The project is said to be under the reigns of Yu-Ming Wang, head of the CDO group. He did not return a call and Jim Pierpoint, a spokesman, declined to comment.
The size of the funds could not be determined. However, given that equity classes are often in the range of $10 million, a portfolio would not need a ton of cash to take on a levered exposure to the CDO market, according to analysts. "Let's put it this way, we're not talking billions here," says one.