At least three pooled trust preferred securities CDOs, including Preferred Term Securities VI, MM Community Funding IV and an undisclosed issue via Bear Stearns, are now sourcing well over $1 billion in collateral.
Sources report that there is a limited supply of diverse, high-quality regional bank trust preferred securities issuers, making an increasingly competitive landscape challenging for dealers ramping up. Nevertheless, one investor noted that "bad banks often get taken over by good banks and the default history for the trust preferred asset class is fairly impressive."
FTN Financial Markets and Keefe, Bruyette & Woods, Inc. aim to print the $500 million PreTSL VI Ltd CDO by mid-June. What is noteworthy about this deal as opposed to past TRUPS CDOs, is its relatively short average life of 10 years. Bankers say the average life in TRUPS CDOs is largely determined by the call option in each deal. Bearing that in mind, FTN structured a 10-year auction call, which is often seen SF CDOs, to get its relatively short expected final maturity on all three tranches of its upcoming transaction. To encourage the call to go through, a turbo feature has been added whereby after year 10, approximately 60% of excess cashflow is diverted from the income notes to pay principal of the senior notes until paid down and then the mezzanine notes until they are paid down.
Now that the secret is out that trust preferred collateral is a stable underlying asset to ramp a CDO with, underwriters are moving to tighten pricing considerably. For instance, PreTSL VI Ltd is talking its $325 million 10-year A/L triple-A notes at 65-70 basis points over three-month Libor. On Salomon Smith Barney's and Sandler O'Neil's last TRUPS issue, MM Community Funding III, the triple-A notes cleared at 105 basis points over six-month Libor.
This summer, the $500 million MM Community Funding IV via SSB and Sandler is marketing its triple-A notes at 90-100 basis points over three-month Libor. MMCF IV's single-A notes are also tighter this time (since the last deal was reportedly two times oversold): 175-185 basis points over three month Libor versus a 205 basis point print in late March 2002. These deals typically have at least a 30-year final legal maturity, hence the wider average life in the past.