More trust preferred securities-backed CDOs are expected to come to the market this year - with the number of rated deals topping $30 billion this month. Furthermore, these upcoming transactions are expected to contain a wider range of assets compared to older deals.
Market participants are expecting the deals to trend toward hybrid structures, which primarily include bank TRUPS, with smaller buckets for both REIT and insurance TRUPS. And even though CDOs backed by real estate investment trust TRUPS and subordinated debt are among the newest structures to hit the market, the overall size of the REIT market is not expected to support a boom in that sector.
Several hybrid deals are in the pipeline, sources said. Additionally, as a number of older TRUPS CDO deals reach their first call dates in the third and fourth quarter of this year, a surge of activity in the hybrid sector is expected, said James Brennan, associate analyst at Moody's Investors Service. And although several CDOs backed solely by REIT assets are expected, the trend in TRUPS CDOs should be toward a more diverse collateral base. "You will have CDOs with a portfolio securities of bank, insurance and REIT securities, Brennan said. We expect this to be the trend going forward."
CDOs backed by TRUPS have become more popular with investors because of their tempting rates of return and solid performance record. The deals consists largely of small- to mid-sized companies that do not have a corporate credit rating - making it more difficult for them to access the capital markets through other avenues. The TRUPS market kicked off with the banking industry, the largest issuer of the securities, in 2000. After this, it spread to the insurance industry in 2002 and, most recently, to the REIT sector in June of last year, according to Moody's.
Based on the size of the REIT market, it is unlikely the amount of TRUPS issuance will reach the level achieved by the bank sector, Brennan said. Moody's has rated four deals backed primarily be REIT TRUPS and subordinated REIT debt, he said, but only expects a couple more. Credit Suisse next month is expected to bring to the market Attentus CDO I, a $514 million deal backed primarily by REIT TRUPS and subordinate debt issued by real estate operating companies. The deal will be the first for Attentus Management Group, a joint venture between financial services firms Financial Stocks Inc. and Sandelman Partners L.P.
But several Moody's rated deals will consist of a majority of TRUPS securities, along with smaller baskets for insurance and REIT TRUPS and subordinated REIT debt. Although the deals will enjoy collateral diversification, Brennan said that fact will not automatically trigger a lower level of required credit enhancement. Elements unique to each particular deal, such as spread, probability of default on underlying collateral and correlation are still crucial to assessing risk. He added: "it is true that once you have different underlying assets, you are going to have a more diverse pool."
According to Moody's, CDOs of REIT trust securities or subordinate debt are comparable to bank and insurance trust preferred CDOs in form and structure, but are not quite the same animal. Trust preferred REIT securities typically are non-amortizing with 30-year maturities and a five or 10-year non-call period, according to Moody's, and subordinate REIT debt also are non-amortizing and mature within 10 and 20 years. Both types of REIT issuances are considered subordinate to the REIT's senior debt.
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