Financial Management Advisors’ (FMA) fourth CBO, FMA IG IV, was brought to market last week via Salomon Smith Barney. The transaction was FMA’s first investment grade CBO.
Despite printing at +54/L versus the firm’s last deal in Oct. 2000, which came in the low +40s (on a wrapped basis), FMA officials said they were pleased with the transaction and would likely come to market again within the next six months.
Rating agencies confined the structure to bonds rated at least 70% BBB- and above, and 30% no lower than BB to avoid a bar-bell effect, bankers said. The deal was fully ramped before launch, which is lead manager Salomon’s usual practice.
The expected default rate marketed is 25bp per annum, with a 50% recovery rate. At launch the deal had a rating factor of 584 and is constrained to 610 using Moody’s Investors Service criteria. Emerging markets and ABS are not allowed in the pool. U.S. credits account for 91% of the pool, about 7% Canada, and one UK bond makes up the balance.
Heading up FMA is acting president Ken Malamed, who was formerly the head of Bear Stearns asset management from 1977 to 1985. FMA has 14 investment professionals and a total staff of 38 people.
The firm is in the process of interviewing two credit analysts to help their CBO effort. FMA has USD2 billion under management, with the majority in high-yield. Its investment strategy is three-fold: 1) look for companies where the management has equity and are personally involved, 2) the company must have the ability and desire to de-leverage its balance sheet, and 3) management has to be accessible. FMA looks for assets in the single-B area and will hold CCC assets on its books.
Steve Michaels, MD for high-yield at FMA, said the major challenges an asset manager faces in today’s market, are: 1) the current default rate (7.5% by his estimate) is hurting collateral, particularly for lower quality deals done a few years ago, and 2) more devastating is the low recovery rate on the collateral, which is almost half of what it used to be.