CastleOak Securities head of fixed income sales & trading Patrick de Catalogne and head of investment banking Michael Turner answer SCI's questions

Q: How, why and when did CastleOak Securities become involved in the structured credit and securitisation market?
PdC: CastleOak Securities has been in existence for six years now and the founding partners all came from another investment bank. CastleOak's background is in consumer-related ABS, such as credit cards and autos, as well as MBS and CMBS.

The idea has been to grow those platforms. My background was in MBS and ABS-related products, so it was a natural progression when I joined CastleOak to be further involved in that sector of the market.

CastleOak is active within secondary trading, as well as in the primary markets, where we are active in consumer ABS as well as mortgage-based securities, such as agency CMOs and CMBS.

On the secondary side, CastleOak acts strictly as an agent: we do not position or take risk on our platform. We offer liquidity to both buyers and sellers in the market.

Our primary market function is on the distribution side. Over the past four years we have been involved in approximately 79 primary ABS transactions that in aggregate are worth over US$52bn. We also took part in two CMBS transactions this year.

MT: From an investment banking client standpoint, many of the industry sectors and companies that we work with use a dual funding model, so that they can annually plan their financing along the secured and non-secured side. The secured side of the funding for many companies acts as a form of liquidity and back-up funding for when the unsecured markets aren't open. And in other cases, it's a core form of financing.

Q: What is CastleOak's key area of focus today?
PdC: We continue to focus on consumer ABS, particularly credit card transactions and auto ABS, along with MBS and CMBS. Within secondary market trading, we see quite a bit of demand on the shorter end of the market - deals with a one- to two-year weighted average life.

The average life-span on flows on the larger deals can be anywhere from money market out to three years, depending on their structures. But we tend to see demand on the shorter-life deals purely as a reflection of what our customers are looking for.

Q: What constitutes your main client base?
PdC: Our client base includes Tier 1 down to Tier 4 accounts and that's what we pride ourselves on. We serve the likes of the US$20bn-plus, top-tier asset managers all the way down to the money managers that may have less than US$1.5bn under management. We have a vast array of clients.

MT: In the investment banking area, we have some of the captive finance companies within the automobile sector, specialty finance companies, as well as banking and credit card companies.

Q: What have been the key themes of 2011 with respect to the structured finance market?
PdC: It has really been about issuance. This year - as with the previous couple of years - has been characterised by a diminishing amount of ABS issuance year-over-year. The market has had to adjust itself to that fact. Rating agency actions have also been constantly under scrutiny; i.e. will bonds that are rated triple-A today be rated triple-A tomorrow?

MT: The other theme that I'd add is a constant eye on regulations. Obviously accessibility and funding costs are the primary drivers for the issuance in the sector, but unfortunately a role by the central banks in the US and Europe has been important for keeping the securitisation markets going.

Back in 2009 when the US Federal Reserve had to implement the TALF programme to help stimulate the asset-backed market. CastleOak was one of only four non-primary dealers to act as a TALF agent to act as a liaison between the investors in the asset class and the Federal Reserve Bank.

Q: How does CastleOak differentiate itself from its competitors?
PdC: I think one of the things that we've done as a firm is to initiate ABS forums to get our investors together with issuers, so that they can get a broader picture from the issuer directly to see how their programmes are progressing.

Also, when you look at our firm in comparison to other regional firms that are out there, there are few - if any - other regionals that participate in the primary market like we do. There's also our function in the secondary market: we hear from a lot of our customers that our competency is better than other firms of our size.

Q: What is your strategy going forward?
PdC: Growing our structured credit business has been a focus for us from day one and we plan to continue our expansion, particularly given what is going on in the Street right now. We are looking for good sales people and traders. One of our main aims is to provide liquidity for our clients in these uncertain times.

MT: Over the course of 2012 we plan to continue our focus on the consumer sector within ABS. That is going to mean a continued calling effort on issuers, sponsors, the automobile industry. Their captive finance subsidiaries will also be a focus.

Credit cards will also be a focal point, as well as small ticket equipment companies. We will also be ready to be responsive to new areas of issuance within the asset-backed space. Examples might include the securitisation of solar panels and smart meters.

PdC: Internally, it is all about growth. It's about taking advantage of what is going on in the Street right now and finding quality people and bringing them onboard here, so we can really ramp up our distribution network.

Q: Which challenges/opportunities does the current environment bring to your structured credit business and how do you intend to manage them?
PdC: Issuance - or lack thereof - is a challenge. But the diminished number of investors is also a problem.

Looking back to 2005 and 2006, the greatest part of the investor base comprised ABCP issuers, CDO managers and many of the Yankee banks. They have virtually disappeared now and the amount of bonds that are going to securities lenders have gone too. It's all about broadening the investor base that is going to get involved in the asset-backed space.

MT: We need a boost in and a stabilisation of confidence in the asset class on the part of both issuers and investors to bring confidence back to the market. A lot of that will come from clarity on the rating agency issues, as well as continued development on a regulatory and policy-making front.

PdC: I believe that sustained issuance on a regular basis brings investors back into the mix. There's got to be clarity that there will be regular issuance from issuers to give investors the incentive to get involved in the sector. This will open up opportunities in the secondary market too.

The covered bond market is yet to come to fruition in the US. Yankee banks have been the primary issuers, so we will be looking closely at how that plays out and how it is accepted on a regulatory basis.

AC