BlackRock has structured a $500 million commercial real estate collateralized debt obligation with considerable flexibility during the ramp up and reinvestment period. Kimberlite CDO I is the first to allow a manager to replace credit default swaps with total return swaps during the reinvestment period. In addition, the transaction, which has a 90% synthetic concentration, has unfunded and funded liabilities, which also gives BlackRock additional flexibility. BlackRock officials did not return calls.
The CDO will include a $333.5 million unfunded super senior class with Wachovia Securities as the swap counterparty. It will also issue approximately $166.5 million of funded notes and funded subordinated notes that reference a $500 million portfolio of BBB- and BB- rated cash CMBS bonds. Kimberlite is among the few to reference a portfolio of lower-rated securities to take advantage of the growing number of credit intensive investors, including hedge funds. UBS and its asset management subsidiary Dillon Read Capital Management are marketing a similar offering, a $1 billion private deal, DRCM CMBS CDO 2006-1.
BlackRock may have elected to replace CDS for TRS to take advantage of the variance in pricing for the derivatives, market participants speculated. Kimberlite also has a larger than usual reserve pool set aside and liquidity facilities in place that can be funded or unfunded on day one. Reserve pools are funded on a deal by deal basis with attachment and detachment points, which help a manager to determine when CDS and TRS are settled. Attachment and detachment points are being tailored based on a deal's capital structure and other factors, including losses and spread triggers, market participants added.