As deteriorating economic conditions continue to pound the structured finance markets, financial institutions across the board are looking to either shed assets from their deflated portfolios or take advantage of undervalued securities.
Assisting in these efforts is NewOak Capital, an integrated advisory, asset management and structured products firm recently founded by former BlackRock Head of Structured Finance Ron D'Vari, and Fortis Securities' former Head of Structured Credit James Frischling.
The first inkling that such services might become necessary came about a year ago, according to D'Vari, as disconnected functions in the market were brought to light between the people who were structuring deals, those who dealt with the underlying loans, and those who were involved with credit and trading.
Given the high dysfunctionality in the marketplace, an integrated and granular approach to the entire market had become necessary, D'Vari said.
The granular approach is especially critical because it means you really need to know what is going to happen underneath securities, D'Vari said.
"It became clear about a year ago that this structure will not work," he said. "The problem is residential was being mixed with commercial and commercial was being mixed with corporates. People's portfolios were full of these securities and nobody could translate performance from the bottom collateral level to the parent security level."
Over the last year, the market was also hit with the realization that it is very interdependent, which has made losses systemic on a global scale. "To some extent that is what chaos theory is. A butterfly in Australia flaps its wings and we get a storm in North America. That is what is going on in this crisis," D'Vari said.
NewOak Capital rose out of this necessity to understand the underlying links, as well the need to look at all the assets in a given portfolio, or a number of portfolios, at the same time, in order to locate the weaknesses. Currently, the firm is in discussions to open offices in both Europe and Asia.
Risky Business
Among the firm's business lines are analysis, valuation, restructuring, risk transfer, and management solutions for both financial institutions and investors.
Through its asset management business, NewOak Capital will first focus on transferring portfolio risk, or "de-risking," as D'Vari refers to it. The firm will examine not only the assets but the strength of the asset-holding entities themselves, he said. "It is not just the asset but where it is held. And with help, sometimes it needs to be moved from weak hands to strong hands. You need somebody to decide how much it is worth, what is going to happen to it, and say: 'By the way, we could help identify a party who wants to buy it.' We are performing this risk transfer."
There is also the potential for distressed asset funds, although D'Vari said NewOak Capital will first seek to identify the assets before contacting an investor base, a business plan he feels is more effective than ramping an open fund to go out and make purchases. "The question is, How do you look at it," D'Vari said. "Do you put the fund together and then go find the assets, or do you find the assets and then go find the buyer? People like to do their due diligence and we like to be able to provide them with the detailed analytical information."
As for the assets they will hone in on, the firm has had early success in advising on de-risking "banged up corporate synthetic obligations," D'Vari said. NewOak Capital will also look into buying both debt and equity, as well as distressed RMBS and CMBS.
This is where the firm's affiliation with EdgeMAC , the mortgage advisory platform of mortgage loan originator Agire Mortgage Corp., comes in handy.
"We are bringing highly granular projections based on real outcomes we are seeing," D'Vari said. "For instance, if you had a loan how long does it take to modify it; how much balance do you need to reduce? That data comes from EdgeMAC, our mortgage advisory affiliate. We are at the point where we need to use our brains over computers. We need to project the cashflows ourselves."
NewOak Capital is making a similar effort with commercial mortgages. "We are trying to bring a high resolution or high touch approach to the analysis," D'Vari said. "Then you have to have scale, which means you have to roll that analysis up from the very bottom to the top of a deal structure for a large set of securities."
This includes starting at the basics of a transaction, the loans - residential, commercial, corporate - and moving up to the securities - MBS, CMBS, CLOs, CDOs and CDO squareds. "A lot of people were looking at deals from a top angle and did not really understand the credit dynamics upstream," he said.
Scouting a Team
Assisting with these efforts is a slew of heavy hitters from the structured finance market, or "good athletes," as D'Vari calls them. "In this market, you need a team of people who are able to take granular information, in a disciplined fashion, and roll that information through the deal structure. They understand collateral, they understand structure and they understand clients. If you don't get all three in one place, you don't have a solution."
Earlier this month, NewOak Capital brought on Managing Directors Jess Saypoff, formerly of Barclays Capital, as chief counsel, James Dougherty, formerly of Deutsche Post Bank and JPMorgan Investment Management; Ross Heller, formerly of JPMorgan Securities; Neil McPherson, formerly of ABN Amro and Credit Suisse; Shanker Merchant, formerly of Wachovia; and Precilla Torres, formerly of Citigroup and Lehman Brothers.
The firm's other recent appointments include directors Arjun Kakar from NIBC; Peter Heintz from UBS, Alex Razumny from Bear Stearns and associate directors Max Marquardt from Citigroup and Irina Shulmanovich from Fortis.
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