At press time, First Union was closing an approximate $200 million collateralized debt obligation backed by bank capital trust pass-through certificates. The second-of-its-kind deal, called Preferred CPO, is said to be similar to Salomon Smith Barney's $225 million Regional Diversified Funding (RDF) which closed in late March.

"Now that they've got one under their belt, there are a couple of other banks looking to do similar deals," said an analyst familiar with these transactions. "First Union is one example. There's another deal that should come within the next few months."

Though First Union declined to comment on Preferred CPO, the deal, which priced on July 12, is said to be rated by Moody's Investors Service and structured in at least two parts, one rated Aaa, and another rated Baa3. Further details were unavailable.

Bank capital trust pass-through certificates, also called trust-preferred securities (Trups), are 30-year bonds issued by regional banks. What makes the bonds so attractive, however, is that they are able to receive tier-one capital risk weighting by the Federal Reserve Banking System.

"The Fed will treat it as tier one capital, even though it's deeply subordinated debt," said a source familiar with banking regulations.

According to the analyst, one of the biggest hurdles with a Trups CDO is that the securities are 30-year bullets, which creates a lot of risk at the back end of the deal. If some of the larger banks were to default toward the end of the term, it would create significant problems for the deal.

"That's one of the major hurdles," the analyst said.

Regional Diversified Funding not only broke ground by issuing a Trups CDO - no less with a 30-year maturity (where CDOs are generally medium-term) - but it was also the first such vehicle backed exclusively by new issues, a source said.

Further, none of the bonds backing the deal were individually rated, therefore the credit analysis was similar to that performed on asset-backed deals made up of loans, where the rating is derived from the statistical performance expected from the entire pool of unrated debt.

Statistically, the individual bonds, on average, perform in line with a triple-B rating, the source said. However, Salomon was able to structure the transaction so that 90% of it received a double-A-plus rating from former rating agency Duff & Phelps.

Unlike RDF, it's said that the bonds backing First Union's Preferred CPO bonds required shadow ratings; however, that is unconfirmed.

Though Duff &Phelps rated RDF, Fitch is not rating the First Union deal, as the combined credit rating entity is in the process of developing its approach to this type of transaction.

"We see some potential for there to be similar deals to this one in the future, so we're in the process of reviewing how [DCR] went about looking at the deal, and making sure that the criteria used was in line with how we'll look at it now," said an insider at Fitch.

In other CDO news, Lehman Brothers was shopping its Madison Ave CDO to investors last week, said market sources.

According to published reports, the $350 million transaction is structured in seven tranches with ratings ranging from Aaa to Ba3 (Moody's). -

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