Deutsche Bank is structuring a private real estate backed-collateralized debt obligation called "STRIP," for which it took the unusual step of having parties involved sign a confidentiality agreement. The agreement is motivated by Deutsche Bank's desire to keep its methodology secret, almost as a form of intellectual property. Parties bound to secrecy include the bankers, lawyers, rating agency analysts and investors involved. A lawyer says it is "very surprising" that rating agencies analysts would be bound by confidentiality and that he has never heard of such thing.
Deutsche Bank is in the process of marketing the CDO, but the exact pricing, timing and size could not be determined. Repeated calls to Sunil Madan, the banker working on the deal, were not returned. Milton Chacon, the analyst at Moody's Investors Service, and Jim Palmisano, from Standard & Poor's, who both rate the transaction, declined to comment.
The CDO involves the stripping of premium triple-A commercial mortgage-backed securities tranches for its collateral, says a CDO market participant. Deutsche Bank did two very "quiet" STRIPS deals last March and October in which it repackaged a pool of interest only (IO) CMBS bonds into a CDO. But this deal is different in that the collateral includes IO tranches coming from CMBS offerings and also new IOs created by stripping premium bonds bought on the secondary market. Deutsche Bank buys high premium triple-A rated tranches, strips the bond, breaks it into two bonds, selling one at par and recycling the other, the new IO, for CDO collateral, the market participant says.
The essential motive is arbitrage, as some seasoned CMBS tranches can trade as high as $120 based on their low prepayment risk or depending on the vintages. By stripping those high premiums, Deutsche Bank can realize decent spreads. Premium bonds are also out of favor and stripping them at par facilitates their trade. A CMBS analyst also says one possible impact of structuring this type of CDO is to remove IOs from the trading universe which, to a degree, contributes to the current CMBS IO rally.
The STRIP CDO is a static deal and there is no active collateral manager for the purchase of the pool backing this transaction, another market participant says. Deutsche Bank Asset Management originates the IOs, with Deutsche Bank, the underwriter, repackaging the collateral into a CDO. Compared to last year's deals, the collateral pool is also more diversified, with 30 different transactions in the collateral pool diversified by issuer and by vintage.