First Union Securities, Inc. recently developed a new innovative structure that allows the A2 tranche of an asset-backed deal to be sold as a money-market eligible bullet security.
The structure used on the recently priced $760 million CIT Group equipment ABS deal and a $883 million transaction issued by Copelco has the A2 tranche being repaid from money that is set aside at closing in a trust account.
"This is an innovation that offers our equipment ABS issuers 10 to 15 basis points of interest savings while the bullet security is outstanding," said Manoj Kumar, a vice president with First Union. "These are the first two transactions in which this structure has been used."
Rob Christensen, an associate with First Union, added that although the advantage is about 10 to 15 basis points, it all depends on market conditions.
"When spreads go out in the asset-backed market in general, the more advantage this structure will have," Christensen added.
First Union led two equipment ABS deals in the last three weeks - one for Copelco and another one for CIT.
"You can see the clear pricing benefit from this structure," Kumar said. "For example, Copelco priced its 11-month class at one month Libor flat. In the same week, General Motors priced its comparable maturity class at Libor plus six. Clearly, GM typically trades better than Copelco, however because of our structure, Copelco priced 6 basis points better than GM."
The same class for the CIT deal priced Libor minus one which shows increasing acceptance among investors, Kumar said.
"A lot of credit also goes to our issuers," said Kumar. "...Frank Garcia of CIT was quick to se the potential of a structure of this type and was key in its implementation."
Kumar speculates that First Union will continue to use the structure for other issuers depending upon market conditions and whether or not they see an advantage. As far as other asset classes mirroring the structure, he feels that autos would be the most likely candidate to use it. -