Citibank's Hedged Mutual Fund Fee Trust priced its first offering for 2004 last week, and it was also the first 12b-1 fee-backed transaction of the year. The sector appears to be unaffected by the noxious headlines that have plagued the mutual fund industry during the past year.

The $331 million single-tranche, double-A rated floater priced at 135 basis points over one-month Libor, representing a 10-point tightening over the comparably structured A class from the 2003-3 series, which priced in November. Moody's Investors Service Senior Vice President Michael O'Connor said that despite speculation, it remains improbable that fines will be levied against the funds themselves. "For individuals who have taken action for which they are going to be punished, there is an extreme risk," O'Connor said. "By fining the corporation, all you are doing is hurting the shareholder who has already been hurt." To date, none of the settlements have imposed a fine on the fund.

Nor does O'Connor expect the scandal to have a tremendous impact on redemptions on the funds being securitized. "These funds are all B share programs, so there is a back-end charge if you pull your money out," O'Connor said. Furthermore, most of these funds have not been linked to the scandal.

While there has been some talk of Congress outlawing 12b-1 fees altogether, legislators will more likely focus on disclosure, O'Connor said. Increased transparency for investors could actually strengthen the legal claims of fee programs. "The legal basis of this fee could change to a contract between the investor and distributor, in which case you wouldn't have to worry about the annual reaffirmation of fee programs that you have to worry about now," O' Connor said.

Citibank is currently the sole issuer of 12b-1 fee-backed term ABS. Constellation Financial Management has found securitization to be an expensive option since being acquired by Societe Generale last year and has decided instead to hold the assets on balance sheet.

Copyright 2004 Thomson Media Inc. All Rights Reserved.

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