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Euromoney’s borrower awards 2007 |
| Overall awards | |
| Best sovereign/supranational/agency borrower | Best bank borrower |
| Best insurance borrower | Best ABS |
| Best CDO borrower | Best covered bond issuer |
| Best corporate borrower | Best high-yield/leveraged finance borrower |
| Latin America regional awards | |
| Best sovereign borrower | Best corporate borrower |
| Best financial borrower | |
| Central & Eastern Europe regional awards | |
| Best sovereign borrower | Best corporate borrower |
| Best financial borrower | |
| Asia regional awards | |
| Best sovereign borrower | Best corporate borrower |
| Best financial borrower | |
| Middle East and northern Africa regional awards | |
| Best borrower | |
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“A good CLO manager needs a very strong credit culture. You must underwrite the credit first but be savvy enough to understand the implications of a credit decision on a CLO’s structure. You should not manage credit to the structure – you should manage the credit first” |
There is no doubt that size matters in the CDO market. And Euromoney’s CDO borrower of the year for 2007 is both big and clever. A recent industry ranking put Babson Capital at the top of the pile for corporate cash CDOs, with $15.8 billion outstanding in April this year. The firm is truly international, having been way ahead of the pack in setting up its European operation with the acquisition of Duke Street Capital Debt Management in May 2004. Babson Capital and its subsidiaries had more than $88 billion of assets under management at the end of December 2006, and it is this size that gives the manager its clout in the CDO market. But Babson has also been behind some of the more innovative deals in the market over the past 12 months.
One example of this was the $600 million Sapphire Valley CDO, which involved a unique hybrid construction. “We have leveraged the Babson franchise across different teams in the last 12 months – for example with the Sapphire Valley transaction we teamed up with the structured credit team for a transaction that was 80% loans and 20% liabilities,” says Tom Finke, managing director at Babson in Charlotte, North Carolina. “We are expanding the franchise out from a solid foundation.” Forty percent of the liabilities will be sourced synthetically via total-return swaps, which allows greater exposure to top-tier managers from strong CLO vintages, while reducing ramp-up time.
Being a good CDO manager these days involves being able to use all the tools at your disposal to exploit every market opportunity. Another deal where the firm showed the extent to which it remains ahead of the pack was the Fugu Credit Opportunity Fund established in January this year in Europe, which is designed to invest in leveraged loans that trade between 80% and par. The fund is being ramped up with assets that are near par at the moment but the firm is well aware that things could change. “You do have to throw manpower at difficult situations so we are quietly recruiting. There is not a lot of product changing hands at stressed prices at the moment but we expect there will be more next year and perhaps even in the fourth quarter of this year.” The fund involves a five-year TRS with Bank of America. “Even though this is essentially a hedge fund structure, most investors have chosen to lock in for two or three years, which makes it very stable,” says Babson Capital Europe chief executive Ian Hazelton. In Europe, the firm called its Duchess 2 fund this year and the return underscores Babson’s performance in some tricky markets. “The Duchess 2 fund returned over 21% IRR – which even after incentive fees is still in excess of 18%. It was launched in 2003, which was not the easiest time to launch a fund, so we think that it has performed very strongly,” says Hazelton.
The launch of Invicta Credit in January this year saw Babson move into the credit derivative product company industry. Invicta is the first CDPC to be wholly owned by a financial institution – Babson parent Mass Mutual. Babson itself is managing the portfolio. “The CDPC project had been under consideration for some time. Mass Mutual had looked at various alternatives, such as setting up a monoline, but a CDPC was the most attractive model,” says Matt Natcharian, head of structured credit at Babson in Springfield, Massachusetts. The CDPC achieved Mass Mutual’s goal of diversifying its investment portfolio. “This is a unique model within the CDPC industry,” says Natcharian. “It gives Mass Mutual access to a part of the capital structure for which otherwise the spread available would be too low.”
Babson CLO deals routinely price tightly across the capital structure in recognition of the experience and track record of the loan team and the structured product market’s recognition of Babson as a strong manager.
“A good CLO manager needs a very strong credit culture,” says Finke. “You must underwrite the credit first but be savvy enough to understand the implications of a credit decision on a CLO’s structure. You should not manage credit to the structure – you should manage the credit first.”
