Bigger And Better Deals In Works For Constellation, Mutual Fund Fee Sector's Shining Star


Constellation Financial Management Co., the company that pioneered the mutual fund fee sector, is expecting to announce a deal in the upcoming weeks that will definitely be "bigger than the last one," said Pat McAllister, a principal with the company.

The five-year old New York-based company was founded by Tom Mann and Mark Garbin for the purpose of providing off-balance-sheet finance to mutual fund companies and insurance companies to pay for back-end loan distribution expenses.

"An example of this would be a mutual fund B share where the mutual fund company pays the brokerage fee as opposed to the consumer paying the fee," explained McAllister.

"The mutual fund company gets additional fees from the fund to compensate for having upfronted that money. We are providing financing against those back-end fees."

Constellation had its first groundbreaking deal last May with a $200 million mutual fund fee-backed securitization. This deal is one of the largest 12b-1 securitizations on record, and the first to receive a double-A rating. (ASR 5/17/99)

The company's last securitization, which priced in September, was a $175 million multi-tranche structure backed by the fees collected from underlying assets in approximately 250 mutual funds.

"We structured the deal to include only investment grade notes," said McAllister. "The effective subordination on that deal was structured in the form of a derivative trade with a triple-A-rated institution. Effectively we swapped what would have been double-B rated notes and sold triple-B rated notes instead."

But what made them venture off into this market?

"Until 1998 we were a buy-and-hold investor in this asset class," said managing director Joseph D'Anna. "As we grew and added clients, we began to feel that the diversity we created on our asset side should be matched by a greater diversity on the liability side. The asset-backed securities market is a very efficient and interested holder of the risk and rewards of our asset class. Notes backed by 12b-1 fees and insurance asset related fees are very attractive to ABS investors."

"The only thing that our company does is buy, manage and securitize these distribution fees," stated McAllister.

Bright Lights For 2000?

Examining the market of mutual fund fees, McAllister feels that "there is good value in the right deals and little to no value in the wrong deals."

"A lot of what we do is very closely related to equity markets," he added. "People might be a little concerned about over-valuation in equity markets right now, but we don't think that's an issue for a long term investor who is engaged in a program of buying assets steadily over time. People should develop the right relationship with us and become a consistent long-term investor. The market is actually very attractive for an investor in this position."

The company has experienced a tremendous growth increase since its first deal in May. Its volume of asset flows into the company has increased by 50%, and it expects to at least double the amount of deals that it issued last year.

Looking into the year 2000, Constellation hopes to issue at least one deal each quarter, and forecasts an increase in the size of the deals as well. The company anticipates that it will be selling "approximately a billion dollars plus of asset-backed notes."

"We're trying to expand the depth of the market to accommodate deals in the $300 million to $500 million range," McAllister said. "We expect our asset flow to support about four of these deals per year."

McAllister predicts that the market will begin a rapid development this year. "Our competitors have, to some extent, responded to the initiatives that we have brought. The volume of assets coming into the market should be increasing quite dramatically. Hopefully that will mean the market will grow more efficient and people will have better deals to choose from."

A System That Works

The founders of the company and the outside investors are all extremely committed to furthering the understanding of the assets in general and furthering the communication of that understanding to both the buyers and the sellers.

Constellation follows a few key strategies when approaching a new deal. One of them is to structure its deals not only to maximize what it can get out of a particular deal but to create a program of attractive deals that investors can get into and invest in again and again, over time.

"We try to optimize the structure of each deal so an investor can buy a sequence of deals and build an optimally diverse portfolio of mutual fund fee-backed notes," explained McAllister.