Magnetar Financial, an Evanston, Ill.-based multi-strategy hedge fund, is dominating the market for asset-backed securities collateralized debt obligations by buying bespoke deals in massive sizes. The fund has enlisted a clutch of Wall Street firms to structure full-capital structure deals in which it buys the equity slice.
Three CDOs have priced or closed so far, each over USD1 billion and named after an astrological constellation, and a handful of others are in the works. The structures consist primarily of credit-default swaps referencing sub-prime residential mortgage-backed securities.
The fund was founded last fall by Alec Litowitz, former global head of equities at Citadel Investment Group, and Ross Laser, former president and managing partner at Glenwood Capital Investments, and has been making waves in synthetic ABS.
The deals are being pushed through in such size that spreads are tightening and structurers gripe it is becoming difficult to ramp. It also is becoming difficult to place the rest of the capital structure. "There are a lot of very similar transactions, in very large sizes, all at the same time," said one. "We're running into traffic and don't want to get stuck."
Magnetar officials did not comment specifically on the rationale behind the strategy. In an emailed statement to DW, however, David Snyderman, senior partner and head of global fixed income, said the fund is "excited about the opportunities in the mortgage derivatives market." Market participants speculate the fund is shorting other parts of the capital structure against its long equity positions.
Among the fund's deals are UBS and ACA Capital's USD2 billion CDO, ACA Aquarius 2006-1 (DW, 7/21), and Calyon and NIBC Credit Management's USD1.3 billion deal, Orion 2006-1 (DW, 5/12). Citigroup and N.J.-based GSC Partners closed a USD1 billion deal called Cetus ABS CDO 2006-1 last month, and the pair is now marketing Cetus ABS CDO 2006-2. Deutsche Bank andState Street Global Advisors are marketing a USD1.5 billion deal called Carina, and Calyon and Putnam Investments are marketing one called Pyxis. Merrill Lynch also is working on a deal.
"This is definitely testing the liquidity of the CDS market," one manager said. Most participants said current tightness of spreads is unsustainable. They anticipate a pullback in demand and spread widening over coming months.
