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March 02, 2018  

ED&F Bowing Out of Secondary Market

Broker-dealer ED&F Man is getting out of the market for structured products.

Group head Darryl Smith already is in the process of laying off his New York-based sales and trading staff, sources said. Smith will exit as well.

Among those on their way out are collateralized loan obligation specialists Stanton Lenahan and Anthony Veltri. Lenahan, formerly of Guggenheim, had started in 2015 as one of Smith’s first recruits. He is looking for a new job. Veltri, who arrived in 2016 from Maxim Group with a focus on equity securities, is headed to Janney Montgomery Scott.

Other casualties include mortgage-bond trader Jashin Patel, who arrived in June 2017 from Cantor Fitzgerald.

While ED&F dealt in a mix of securitized instruments, it was best known for arranging trades of the mezzanine and equity pieces of CLOs. Its exit mainly reflects a decrease in secondary-market opportunities in that market.

Smith, formerly of RBS, had led London-based ED&F into the CLO sector in 2014 — positioning the firm as the first of about a dozen broker-dealers to pursue business that larger banks abandoned in response to proprietary-trading limits under the Dodd-Frank Act’s Volcker Rule. But many of the bigger institutions since have returned with an emphasis on matching CLO buyers and sellers, as opposed to trading for their own books.

Secondary CLO-trading volume as a whole has been slow over the past year as well. And the effects have been amplified as an ongoing flood of new deals has left investors with little time to pursue secondary-market transactions.

What’s more, heavy CLO-refinancing activity has helped the big banks arranging those exchanges keep tabs on buyers. “When the big banks were pulling back, the business model made a lot of sense,” one investor said. “Now, not so much.”

Other broker-dealers that entered the CLO market alongside ED&F included KGS-Alpha Capital, under former Deutsche Bank trader Richard Rizzo, and R.W. Baird & Co., under Credit Suisse alumnus David Barrish. While it’s unclear if any others have exited the sector, sources said some have cut down to single traders who are picking up business where they can. “More will make this decision, if they haven’t already,” another investor said. “The competitive pressures were too much for the smaller shops.”

During its run, ED&F arranged the sales of some $2 billion of CLO securities. The firm’s withdrawal comes after head CLO trader Alex Belgrade left in April 2017 to join Eagle Point Credit, a buyer of mezzanine and equity securities. Belgrade previously worked with Smith at RBS.

Still, some competing dealers see promising times ahead, perhaps aided by a decrease in competition. “The calm of the last two years will not continue,” one competitor said. “And when the volatility comes it will shake loose a lot of bonds.”