Vertical Capital, an investor in managed collateralized debt obligations in which Bank of America holds a minority stake, is marketing the first CDO of its own, according to Tom Pearce, president of the firm in Atlanta. He says the mezzanine and equity tranches of the $1 billion CDO squared, or repackaging of outstanding CDO paper, have already been placed and the issuer is working on selling the deal's senior tranches to investors. Banc of America Securities is underwriting the transaction. The bank owns 42% of Vertical. However, he says Vertical is not a captive issuer of BofA and the bank does not have any exclusivity rights on the asset manager's future transactions.
Pearce says this deal is unique from most CDO squareds because nearly all of the notes it plans to issue (90%) will be synthetic, with the remaining 10% issued as cash securities. Although it is becoming more common for collateral managers to insert synthetic assets in CDOs, the actual CDO notes themselves are normally cash. Pearce calls the structure "a different kettle of fish" and says it allows Vertical to buy high-quality, triple-A rated paper for the deal. This is also unusual, since CDO squareds usually repackage mezzanine risk. "We don't have to rely on cash financing; the net effect of that is it gives a lower overall funding cost so we can manage one of the highest-quality credit portfolios in the marketplace," he says. Pearce declines to be more specific, except to say that the structure is something that only collateral managers with a large balance sheet backing it, such as Vertical, can do.