CDOs and Other Structured Products

 

Collateralized Debt Obligations (CDOs)

 

Fieldstone Capital Group is a division of a registered broker/dealer Fieldstone Services Corp. Fieldstone Capital Group is based in New York and has two main business lines: the High Yield group and the CDO team. The CDO team covers the area of Collateralized Debt Obligations (including CBOs and CLOs), pursuing opportunities to help clients with valuation, research, and secondary market trading.

 

The primary goal of the CDO team is to help create an active secondary CDO market. Currently, the CDO secondary market is very illiquid - primary issuance dealers "make markets" in their own issuance, but not in others. The term "make markets" can be used only loosely as the quotes given by dealers tend to be wide, often with a 20 point spread. Healthy markets are transparent, liquid, and have multiple market makers. The primary goal of the Fieldstone Capital CDO team is to help create an active secondary CDO market.

 

At Fieldstone Capital, we believe that impaired tranches are currently mispriced because the:

 

  • currently accepted analysis marks bonds at par until defaults occur
  • default assumptions tend to be overly optimistic
  • trustee reports which investors rely on are static

 

As an independent broker/dealer not involved in the primary CDO market, we aim to bring greater pricing transparency and liquidity to this market through proprietary research.

 

We have developed a market based valuation model based on:

 

  • real world pricing of all bonds in a portfolio - a snap shot NAV
  • prediction of the distribution of future portfolio defaults on a bond by bond basis, not a constant current default rate as is commonly used
  • prediction of future flows to each tranche to arrive at an NPV valuation

 

The above factors are then run through a Monte-Carlo simulation to come to a comprehensive valuation. By way of confirmation of the validity of our approach, one of the Big Four accounting firms has contracted to use our model for its audits.

 

After an initial client meeting, and the signing of a Mutual Non-Disclosure Agreement, our team walks through the model in detail and discusses the areas of the CDO portfolio that require action.