A small wave of collateralized debt obligations backed by trust preferred securities (see Trups ASR 7/31/00) should be in the market over the next month or so, said one market source.
As many as three deals should close by the end of February.
First Tennessee Bank is readying a sequel to its Preferred Term Securities (or Pretzel) CDO I, a $311 million Trups-backed deal that closed last September, according to the market source. The deal was structured in three parts: a senior piece, a mezzanine piece and an equity piece.
Salomon Smith Barney, which developed the technology, is said to be readying another Regional Diversified Funding deal, which was the first CDO backed by trust preferred securities.
Details on the third issuer were unavailable, although the source said that the bank has been trying to bring the deal for some time now.
Trust preferred securities are attractive to banks because they are considered tier-one capital.
"From the bank's perspective, they walk and talk like debt, but they get treated like equity from the bank regulatory perspective," said Brian Gordon, a CDO ratings analyst at Fitch. "So even though it's debt, it is in addition to, rather than a leverage against, their capital base."
According to Gordon, one of the biggest hurdles with a Trups CDO is that the securities are 30-year bullets, which creates back-end risk. Also, trust preferred certificates are deferrable, and, because all the obligors are banks, there are issues of industry concentration.