HYPO Public Finance Bank earlier this month closed the first

synthetic CDO that derives credit enhancement solely from reference obligations, according to several sources. The $3 billion Pegasus 2006-1 came to market via two triple-A rated tranches referencing U.S. CMBS assets. The deal consisted of repackaged triple-A rated U.S. CMBS bonds - but what made it different from other transactions was the lack of subordination beneath the deal's triple-A tranches, according to one market source. Instead, subordination was derived from each individual reference obligation; 20% of the notional would need to erode before note holders incurred any losses. HYPO is likely to manage another such deal backed by different collateral, sources said.

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