The structure was created by Citi for TCW, which saw an opportunity to invest in what had been a much maligned part of the capital structure. Highland Capital Management is also said to be working with Citi on a similar deal (LMW, 12/15).
Vandana Sharma, an analyst at Standard & Poor's, explained how the PIMCO deal works. The partially funded synthetic structure reduces the cost of the liabilities due to the fact that only $135 million of funded liabilities are issued. There is a $317 million unfunded super senior piece held by Citi. The issuer synthetically invests in an actively managed portfolio of pro-rata loans. The issuer then enters into a swap agreement with Citi, whereby the bank will be the buyer of protection on the portfolio of revolvers and term loans. The equity and then funded notes take the first losses.