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GLG Institute PresentationCollateralized Debt Obligations
Jim Finkel
CEO, Dynamic Credit Partners
© 2007 Gerson Lehrman Group Inc., All Rights Reserved
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© 2007 Gerson Lehrman Group Inc., All Rights Reserved
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Council Member Biography
Jim Finkel is the co-founder and Chief Executive Officer of Dynamic Credit Partners. Mr. Finkel and his team compile collateralized debt obligation (CDO) packages for investors; specializing in bond portfolios (CBOs) and hedge funds. He is primarily responsible for sourcing investment opportunities, risk management, marketing and compliance. Mr. Finkel has over 20 years experience in the area of structured finance and has transacted in CDOs since 1996. Previously, he was Managing Director of the European CDO team at Deutsche Bank in London. Prior to DB, Mr. Finkel was in the structured products/derivatives group at Bear Stearns in both London and New York (1996-2000). He also has significant mortgage-backed and asset backed experience from his first trading desk position with Nomura Securities in 1992-1994.
© 2007 Gerson Lehrman Group Inc., All Rights Reserved
Agenda
► Components of a CDO ► Developments in the CDO Market► Current Market Dynamics► Asset Class Comparison
7
First Thing-Let’s Kill all the Journalists
““Sound Credit Tool Or Toxic Waste?” Sound Credit Tool Or Toxic Waste?” Applied Derivatives, December, 2004
“A Ticking Time Bomb?”The legacy of the early days of the synthetic collateralized debt
obligations market could be a painful future for many of the institutions involved.
Risk Magazine, October 2004
“Are Derivatives WeaponsOf Mass Financial Destruction?”Is a Meltdown Cooking in Exotic Assets,Or Can Markets Handle the Next LTCM?…Warren Buffett warned that the global financial system was held hostage to ticking "time bombs" and at risk of a ticking "time bombs" and at risk of a "megacatastrophe.“"megacatastrophe.“Financial Times, May 2006
“A scandal waiting to happen?” Tuesday, 26 February, 2002, BBC News, referencing CDOs as the next Enron
“ “The Toxic Avenger”The Toxic Avenger”Collateralized debt obligations raise capital for junk-rated borrowers.CFO.com, January, 2002
The Poison in Your Pension
“As the $503 billion-a-year CDO market thrives, CDO marketers like Bear Stearns and Citigroup find buyers for the portions known as toxic waste, the equity tranches.”
Bloomberg Markets, July 2007
“Structured finance CDO—not cash on delivery”Structured finance can bring unstructured losses…. The chairman of American Express, Kenneth Chenault, was man enough to admit last week that his outfit “did not fully comprehend” the risk underlying a portfolio of whizz-bang investments known as CDOs.The Economist, July 2001
“Barclay’s ‘Toxic Waste’ Row with German Bank Settled” Barclays had settled a high profile dispute with a German bank which was claiming $150m to cover its losses in financial instruments which have been described by regulators as “toxic waste”
The Guardian, February, 2005
“Invest at the Point of Maximum Pessimism”
Sir John Templeton
Collateral Debt Obligations: Complex and Risky - Yet PopularFinancial Times, November 2004
8
Example of a Typical Cash Flow CDO Structure
Bonds
Bank Loans
Middle Market Loans
Emerging Market Debt
ABS (Asset-Backed Securities)
MBS
(Mortgage-Backed Securities)
Arranging Bank Upfront Fees and
Ongoing Senior Management Fees
Upfront Deal Expenses (Legal/Rating Agency/Accounting)
Ongoing Administrative Expenses
Senior Notes: Aaa/AAA to AA rated
Bearing coupons of LIBOR + 25 - 80
Mezzanine Notes: A through BB rated
Bearing coupons of LIBOR + 100 - 1100
Ongoing Junior Management Fees
Equity Tranche12% Equity = 8x leverage
8x leverage of 2% excess spread
= 16% projected IRR
All in“cost of funds”
6 %
12% of Capital
StructureYield = 8%
ASSETS DEBT LIABILITIES & EQUITY
2 %ExcessSpread
88% of Capital
Structure
MBS(Mortgage-Backed Securities)
9
Ramp Up Reinvestment Amortization
Closing
What Does A CDO Manager Do ?
Year 1
Redemption Right at Year 3
Year 4-5 Year 8-10
Auction Call at Year 8-10
Year 12
Final Legal Maturity
Stages in the Life of a CDO
10
Development of the CDO Market
HY Credit defaults
of 2001/2002 take their
toll
Evolution of ‘synthetic’ CDOs from the credit default swap
markets
CDO underlying assets classes converge on more stable,
secured assets (leveraged
loans, ABS)
Market reaches tightest spread levels ever
Issuance volume hits record levels
Efficiencies via enhanced competition
and lower fees
2002 2003 2004 20051996 1997 1998 1999 2000
Rating AgenciesIssue CDO
Criteria
20062001
CDO Manager growth,
consolidation and
personnel shifting
Secondary market develops
2007
Shift in issuance away from HY/EM; beginnings of ABS
CDOs in US
Subprime woes cause market to
correct
CDO Timeline
11
Market Snapshot: Volume and Issuance Breakdown
Source: JP MorganMay 2007
0
50
100
150
200
250
300
350
400
450
500
2000 2001 2002 2003 2004 2005 2006
Global CDO Issuance
Synthetic
Cash
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
2000 2001 2002 2003 2004 2005 2006 2007
Global CDO Issuance by Collateral Type
YTD
$ B
illio
n
12
Growth of ABS CDO Issuance
Source: JPMorgan
0
10
20
30
40
50
60
70
80
90
100
110
120
130
140
150
2000 2001 2002 2003 2004 2005 2006 2007
Issu
ance
in
Bil
lio
ns
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
As of 5/14/2007
13
0
50
100
150
200
250
300
350
400
450
2002 2003 2004 2005 2006
CLO
Col
late
ral S
prea
ds
-
20
40
60
80
100
120
Issu
ance
in B
illion
s
BB/BB- US Lev Loan
B US Lev Loan
US CLO Issuance
Source: JPMorgan
Leveraged Loan Spreads and CLO Issuance Volume
14
Covenant-Lite Loans
15
Euro CLOs currently have lower funding costs and more stable asset spreads than US CLOs.This translates into higher equity returns
Source: JP Morgan
Estimated CLO Equity Returns*
US and Euro CLO Equity Returns
* Hypothetical returns based on the cost of liabilities and asset spreads. Does not reflect actual returns.
IR
R %
16
Alpha Generation through Trading CDOs
17
Dynamic Credit Partners, LLC
18
Evolution of Dynamic Credit Partners
19
each backed by a portfolio of (AAA to A) ABS and CDO debt
tranches
each backed by a portfolio of mezzanine CDO debt tranches
opportunistic, value–orientated investments in
subordinated debt of CDOs and ABS, as well as proprietary risk-
sharing trades
Stockbridge CDOCDO^2
$250mmClosed - November 2004
Lenox CDOHybrid CDO^2
$255mmClosed - December 2005
Sheffield CDOCLO^2
$307mmClosed - April 2006
Sheffield II CDO*Hybrid CLO^2
$325mmClosed - December 2006
Magnolia 2006-11 CDO$40mm
Closed - December 2006
Magnolia 2007-1 CDO$40mm
Closed - March 2006
DCOF II$88.99mm
Launched - August 2005Open
ESE Funding$75-150mm
Launched - December 2005Open to DCOF II Investors
Barrington CDO$1,000mm
Closed - December 2005
Monterey CDO$1,002mm
Closed - March 2006
Barrington II CDO$1,763mm
Closed - May 2007
DCOF I$30.9mm
Launched - March 2004Terminated – December 2005
both referencing a portfolio of BBB rated or higher CDO
tranches
Dalton CDOLong/Short ABS CDO^2
$400mmPriced - May 2007
Investment Products
CDO^2s HG ABS CDOs Bespoke CDOs Structured Credit Funds
*Nominated for 2006 CDO of the Year by US Securitization Awards
20
Organization - Chart
Daniel NigroTrader/Portfolio Manager
Chris SandleitnerABS Analyst
Mendel StarkmanSenior CDO Analyst
Dov WarmanCDO Analyst
Deo SabinoCDO Trader/Analyst
Aniket DeshpandeCDO Analyst
David Schwartz, CFATrader/Portfolio Manager
Sam HaddadCDO Analyst
CDO TeamABS Team
Jim FinkelCEO
Tonko GastCIO
Lauren Wright
Mark Salama
Marketing & Investor Relations
General Counsel
Edward H. Benton, Esq.
Sumeet SablokABS/CDO Intern
David GoldweitzCMBS Analyst
Lily MiaoMarketing Intern
Eugene ShklyarGeneralist Programmer
Steve PenningtonQuantitative Systems
Pamela ByrdDatabase Development
And Programming
Systems & Analytics
John GalloSystems Administrator
Jing LuQuantitative Developer
Andrew RagoneProgrammer
Andrew WaxChief Operating Officer/Chief Compliance Officer
Ashley MontgomeryController/
Investor Support
Karen LlopizExecutive Assistant
Administration
Andrea KollmorgenCDO Support Analyst
David LeeCDO Surveillance/
Opportunities Fund Support
Chris HughesCDO/ABS Trade Support
Operations
21
Mezz ABS CDO
15.9%
HY CBO
12.0% HG ABS CDO
5.3%
Euro CLO
28.6%
CDO 2̂
3.7%CLO
6.6%
Cash
2.7%RMBS
10.0%Prime Auto ABS
1.8%
Bank TRUPs
4.6%
Warehouse Risk
Sharing
8.8% DCOF II is a structured credit opportunities fund
that primarily invests in subordinated CDO and ABS tranches in the secondary market.
Dynamic specializes in analyzing these complex structured credit securities, where mispricings are more prone to occur.
Dynamic is able to exploit these opportunities through its proprietary analytics, its disciplined approach to measuring risk/ reward, and market access due to deep relationships.
Dynamic expects to generate annual returns for DCOF II in the low to mid-teens while placing paramount importance on the preservation of capital.
2x Maximum leverage; current leverage only 10% of NAV
1-year and 3-year lockup classes, bearing 2/20% and 1/15% fee structures, respectively.
Administrator- Meridian Fund Services (NY & Bermuda)
Prime Broker- Bear Stearns & Co., Inc.
DCOF I (Predecessor Fund) launched in March 2004 and was liquidated December 2005
DCOF I Total Return: 20.4% net IRR since inception
Disclaimer: This document does not constitute an offer to sell or buy any securities and may not be relied upon in connection with any offer to sell or buy securities. Any such offer will be made only to qualified investors by means of the Fund’s Confidential Private Placement Memorandum and Subscription Document, which should be reviewed carefully prior to investing. An investment in the Fund is speculative and may involve a high degree of risk. This is not intended for public use or distribution.
Past performance is not indicative of future returns. *As the Sharpe Ratio is based on a very small data set, its interpretation as a performance measure requires caution
49 positions of the 56 in the portfolio have an aggregate of approximately 5,500 underlying credits
DCOF II – Info and Performance
DCOF II Performance Summary
C Share Class
Average Monthly Return 0.99%
Year to Date Return 3.47%
Cumulative Return 24.09%
Last 12 Month Return 13.06%
Annualized Sharpe Ratio* 2.68
AUM as of June 1, 2007 $88.99 million
