Deutsche Bank has recently completed setting up a global credit arbitrage investment arm to invest in fixed-income securities and then either repackage or keep them on its balance sheet, according to BW sister publication Derivatives Week. The firm, dubbed Winchester Capital Principal Finance, could have a balance sheet topping hundreds of millions of dollars, according to market officials. Market officials said Deutsche Bank decided to set this up now because the CDO market has reached a size where it makes sense to have an independent entity investing in different CDOs. Another official speculated that Deutsche Bank had not turned its attention to this before because it had made enough money from its structuring desk, however now that CDOs are becoming harder to shift and margins are decreasing it is looking for new opportunities.
CDO structurers said this can only be a good thing, especially as Winchester Principal Finance would retain many of the deals. Deutsche Bank is putting its weight behind the project, which is demonstrated in the staffers it has chosen to run the firm. Scott Eaton was head of integrated credit trading for Europe and Alex Graham was co-head of credit structuring in London. Both Eaton and Graham declined comment.
Winchester Principal Finance will invest in any structured credit obligation backed by revenue streams, including cash and synthetic collateralized debt obligations, mortgage-backed securities and traditional asset-backed securities. CDO houses have been finding both junior mezzanine and super senior tranches increasing hard to shift as many of the blind pool CDOs created in the last several years have blown up. According to a recent Credit Suisse First Boston report 100% of synthetic CDOs issued in 1997 have been downgraded. However, Winchester Principal Finance will focus on the low risk end of the spectrum and by having access to the whole market will not have to fill deals with the "dogs of the desks."