Fitch Ratings stated that defaults on U.S. bank TruPS CDOs eclipsed the 14% mark on 11 new bank defaults.

Last month's new defaults totaled $129.5 million, which affected 16 CDOs. Additionally, 22 banks began deferring interest payments on roughly $302.5 million of collateral in 23 TruPS CDOs.

"All defaults that took place this past month were among previously deferring banks," said Johann Juan, director in structured credit at Fitch. "The escalated rate of defaults in July did stem bank deferrals slightly."

The 11 new bank defaults bring the total to 134, impacting 82 CDOs. The 357 banks are now affecting interest payments on $6.5 billion of collateral held by 83 TruPS CDOs.

Some respite could come via the the Dodd-Frank Wall Street Reform and Consumer Protection Act, which President Obama signed into law on July 21.

The financial reform bill gives banks a three-month window to redeem their TruPS at face value. If banks redeem their TruPS, TRUP CDOs will benefit from the reduction of default risk in their collateral portfolios.

Moody's Investors Service said that the window affects 7% of TruPS CDO collateral that the agency rates. The extent to which the window applies to a particular CDO will depend on its collateral portfolio composition.

"These TRUP CDOs have exposure to 32 of the 50 top bank holding companies that the Federal Reserve lists as having assets greater than $15 billion as of 30 June 2010," explained Moody's analysts.

Redemption of TruPS held in a TRUP CDO portfolio removes the TruPS from the portfolio and thereby eliminates their potential default risk to the TRUP CDO, analysts said.

The transaction can opt to apply the redemption proceeds, which equal the TruPS’s face value, to amortize the TRUP CDO notes according to the priority of payments stated in the indenture.

"In the absence of redemptions, default risk would climb," Moody's analysts said. "In the past three years, bank failures have occurred at record levels. More bank failures mean more TruPS defaults for TRUP CDOs, resulting in higher losses to TRUP CDO noteholders."

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