Morgan Stanley is expecting to bring to market in February a $650 million hybrid cash and synthetic CDO. Rabobank International will act as collateral advisor and JPMorgan Chase as trustee.

The CDO is another in a growing line of hybrid cash and synthetic structures to hit the market since the latter part of 2005. A growing acceptance of the use of home equity ABS credit default swaps within the market - thanks, in large part, to the release of standard closing documentation - has spurred the growth.

The deal, Bayberry Funding Ltd., will consist of an unfunded super senior swap with a notional amount of $422.5 million. The issuer will bring to market $227.5 million of funded notes and invest in a $650 million portfolio of combined cash and synthetic securities as well as a credit default swap collateral account, according to a Fitch Ratings presale report. Proceeds allocated to the CDS account will be invested in a guaranteed reinvestment agreement.

At closing, the static deal is slated to consist of 91.1% CDS and 8.9% cash assets. At an 86% concentration, the underlying securities on the deal consist of almost entirely residential MBS. Of that, 83% will be subprime collateral. Ten percent of the collateral will consist of CDOs, while an additional 4% will be allocated for CMBS. Bayberry has a six -year weighted average life and a stated maturity date of May 2041, with the first payment date scheduled for May 2006.

As of year-end 2005, Rabobank had six cash flow, six synthetic and two high yield CDOs under management, as well as three asset-backed commercial paper conduits. In total, the group has some $17 billion in assets under management.

(c) 2006 Asset Securitization Report and SourceMedia, Inc. All Rights Reserved.

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