Sage Advisory Services hopes to be the first collateral manager to securitize municipal bonds into a collateralized debt obligation. "We are looking at it. We currently have an investment-grade CDO. We are a muni manager, so it's a nice fit for us, as a firm. We have done a lot of work on that front," says Ed Sullivan, director of research and portfolio management at the Austin-based firm.
To date there has been no CDO backed by municipal bonds. Rating agencies expect the first deal to be completed this year based on what they say is a high level of interest from underwriters.
Sullivan says Sage is "one of the very few [asset managers] that have actually selected a collateral pool and submitted a portfolio to the rating agencies." Rating agency officials indicate that there have been less than five serious buy-side contenders seeking to originate the first muni-backed CDO. On the sell-side, the names of Salomon Smith Barney, Credit Suisse First Boston and Merrill Lynch are rumored to be the likely pioneers, according to CDO market participants. Calls to the trading desks of those firms were not returned.
Sullivan argues that his firm is ahead of the pack as it has found an equity investor for the CDO it wishes to originate. "The rest, placing the debt, is the job of the underwriter," he says. He projects an 8% equity rate of return after taxes, which he says is the equivalent of the 15% level of return seen on a pre-tax level for CDOs. His firm manages a total of $2.6 billion in fixed income out of which $400 million is municipal debt.