UBS Financial Services within the next month expects to close the first visibly rated synthetic municipal collateralized debt obligation. The deal, a $105.07 million portfolio of credit default swaps known as Alpine III, is a pooling of hedged exposure in order to reallocate resources to municipalities and allow the bank additional capacity to enter into future transactions with municipalities, according to Elwyn Wong, analyst at Standard & Poor's and author of the agency's presale report on the deal.
Unlike municipal debt, the coupon on the tranches on the CDO are not tax-exempt. The primary reason for the transaction is not to facilitate the pass-through of tax-exempt interest, but for UBS to free up its capacity. In exchange for a premium, investors are charged with taking on the risk of the reference portfolio, which totals $750 million in size.