Banc of America Securities is readyiny on a USD1 billion CDO of CDOs, dubbed Vertical Capital, in which it enters a total-return swap to transfer the risk. In the swap BofA pays the earnings from the USD1 billion CDO pool and receives a LIBOR-based premium, according to an official familiar with the structure.
Total-return swaps are typically favored as a means of shifting risk when exotic instruments, such as structured finance, are referenced in deals, he noted.
While there has been a recent slowdown in conduits buying AAA CDO tranches, prices on the deals have continued to offer above average yields making it a good time to bring structures to market, said the official. Vertical Capital, which is named after its management company, New York-based Vertical Capital Investment Advisors, is expected to be priced in the fall. Officials at VCIA did not return calls while officials at BofA declined comment.
