In the past few years, just about every bank on Wall Street has established the token all-purpose repackaging trust, several of them set up during the blitz to quality at the beginning of 2001, when retail investors, hesitant in the stock market, wanted bond-like exposure to public companies.
"You could see it as sort of abbreviated flight to quality," said John McCarthy in the synthetic securities group at Standard & Poor's.
Last year, as many as 12 to 20 of these exchange-listed bond passthroughs were launched each month, though investor demand has softened somewhat, and issuance has slowed to maybe six per month, said S&P's Mary Ryan.
Lately, many these vehicles are being used to create synthetic corporate and asset-backed exposures, the bulk of which are ending up in the synthetic buckets of CDOs, which sometimes aren't able to find cash counterparts.
What's notable, according to industry players, is that the use of these once single-product oriented structures has been broadening each year.
"In a way there's no particular direction it's heading in," said David Nirenberg, of Orrick, Herrington & Sutcliffe, and co-author of Federal Income Taxation of Securitization Transactions. "There's no trend in end-use. The trend is the increased use of the technique."
Nirenberg likened the developments in shelf repackaging technology to the beginnings of securitization, when the term was almost exclusively applied to mortgage-backed securities, until securitization technology itself - which was being applied to new assets each year - was bigger than any single product in the market.
"The same thing is happening," Nirenberg said. "What started out as one kind of trade, or product, has turned into a technique."
Initially these multiple-purpose shelf registrations were used to the change the coupon characteristics on bonds, such as from fixed to floating, floating to fixed, currency, and other coupon-type swaps.
More recently, investors seem interested in principal protected structures. In these, a retail investor or institutional investor wanting upside exposure to a segment of the equity market - which has ranged from an index to a particular entity - can purchase a principal protected security, married with, perhaps, a Treasury, so that the end product has characteristics of both. This is similar to what bankers are doing with CDO equity and Treasurys for their institutional clients.
Other uses include stripping from or adding convertibility to a security; adding or removing a callability; dicing a coupon into principal and interest, and many more, added Adam Glass, partner at Sidley Austin Brown & Wood.
"It's a case where the sum of the parts can be worth more than the whole," Orrick's Nirenberg said.
Through its TIERs program, Salomon Smith Barney has routinely been structuring index-linked, principal protected securities, often backed by a portfolio of triple-A credit cards. The most recent TIERs deal, TIERS Principal-Protected Asset Backed DJIA 2002-5, is backed by $5 million worth of Capital One floating-rate credit card notes, and $20 million worth of First USA credit card notes, plus a wrap from Ambac.
Meanwhile, since the early the 1990s, PaineWebber (now UBS Warburg), via its Corporate Asset Backed Corporation (CABCO) has been packaging corporate bonds and redistributing certificates, sometimes exchange-listed in retail denominations, for its clients, which have included Texaco Capital, J.C. Penny and Bellsouth. Warburg's most recent filing for the CABCO trust allows for $3 billion in issuance.
Salomon also has a similar vehicle called Corporate-Backed Trust Certificates (CORTS), which repackages corporate bonds for the retail investor. Last year JPMorgan, in conjunction with A.G. Edwards, filed a shelf called Structured Obligations Corp., allowing it to issue bond-backed stocks over A.G. Edward's retail network (see ASR 11/19/01)
