MassMutual launches new CDPC

New York-based Invicta will act as a counterparty on CDS exclusively within structured credit rather than the single-name market, which its rivals serve

A new entrant has launched into the niche, but fast maturing, market for credit derivative product companies. Invicta Capital, wholly owned by the Massachusetts Mutual Life Insurance Co, becomes the third CDPC, following on from rivals Primus and Athilon. Babson Capital Management, a subsidiary of Massachusetts Mutual, manages Invicta - the first big name in the structured credit sector to run a CDPC.

Like its predecessors, Invicta will invest in credit risk portfolios by acting as a counterparty to other financial entities for credit default swaps (CDS).

"Invicta's major innovation is that it will not be run as a standalone organisation," says Ian Hawkins, Invicta's president. "A small, dedicated staff will work on the CDPC functions, while Babson Capital Management will work on the day-to-day investment process, and financial control functions will rest with Massachusetts Mutual."

This organisation, it is hoped, will give a lower fixed-cost model and allow Invicta to perform well in the face of tight spreads without having to go out in maturity or credit when the risk/reward ratio is not attractive.

"It provides us with the opportunity to participate in the rapidly growing structured credit and credit derivatives market now, even though conditions are not ideal for an entity of this kind," says the New York-based Hawkins. "Given the lead time with these vehicles, one cannot wait for spreads to widen before organising and launching without running the risk of missing the next window of opportunity."

USP

Invicta differs from its predecessors in that it will focus exclusively on structured credit, not single-name corporates, and will be assuming both collateralised debt obligation (CDO) and asset-backed security (ABS) risk rated double-A and above. Given the tight spread environment, it will concentrate at first on triple-A and super-senior names at relatively short maturities of five to seven years.

"We don't believe that the credit cycle is dead and that spreads will not widen in future; we have just organised Invicta to be as efficient as possible in the current environment," says Hawkins. "We anticipate a widening in spreads within three to four years that will make writing double-A risk attractive."

The length of time it took Invicta to get up and running demonstrates the complexity of the launch process for CDPCs. Issuers must secure equity and debt capital while gaining ratings by agreeing operating guidelines, a capital model and carrying out a due diligence review.

Invicta began talking to the rating agencies in earnest in March last year, receiving counterparty ratings and closing its debt late in December. Hawkins believes this is the shortest discussion yet of its type. "Every CDPC will have a different investment mix and different operational needs: we have not reached the stage of a cookie-cutter approach to operating guidelines, although the agencies' requirements are more developed than they were when Primus and Athilon were set up."

Growth industry

Institutions expected to establish CDPCs this year include Lehman Brothers, with Magnetar, Bank of Montreal, with Pallium, and Bear Stearns Asset Management. A former head of global credit derivatives at Royal Bank of Canada, Walter Gontarek, and an ex-global credit products head at TD Securities, Charles Colbourne, are setting up Channel. Deutsche Bank, LBBW and KBC Financial Products have been named as the equity capital investors.

Deutsche Bank and Axa Investment Managers announced in December that they would be co-operating on the NewLands Financial CDPC, to which Deutsche has committed $125 million. Credit understands that final ratings are expected to be agreed in the next few weeks for NewLands, which should pave the way for a launch in early March.

Deerfield, the CDPC set up by Deerfield Capital Management, received a provisional rating from Moody's in March last year, but is yet to launc h. "Invicta is the first of what is likely to be a number of new CDPCs in 2007. Several issues are known to be in the pipeline, and are no doubt at different stages in the launch process," says Douglas Long, executive vice-president of business strategy at Principia Partners, a software supplier for rated operations such as conduits, special investment vehicles and CDPCs.

"The time it has taken for this third entity to join existing CDPCs Athilon and Primus testifies to the complicated and lengthy structuring and rating procedure," adds Long. "Deerfield has achieved a rating on its CDPC, but has still not launched, so the market will be hoping that Invicta might smooth the way for further issuance."

Matthew Attwood