BlackRock has structured a USD500 million commercial real estate collateralized debt obligation with considerable flexibility during the ramp up and reinvestment period. According to sister publication Real Estate Finance and Investment, 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 did not return calls.
The CDO will include a USD333.5 million unfunded super senior class with Wachovia as the swap counterparty. It will also issue approximately USD166.5 million of funded notes and funded subordinated notes that reference a USD500 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 USD1 billion private deal, DRCM CMBS CDO 2006-1 (DW, 7/21).
BlackRock may have elected to replace CDS for TRS to take advantage of the variance in pricing for the swaps, 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.