--Aaron Johnson
The number of collateralized debt obligations backed only by bank trust preferred securities will be on the rise in the next six months because of their low risk of being nipped by the housing market contagion. "In the past, [CDO issuers] were forced to include some bank and insurance in TruPS deals [along with real estate investment TruPS]," said Ricardo Viloria, v.p. at asset manager StoneCastle Partners, on a panel discussing TruPS CDOs at Opal Financial Group's CDO Summit in Dana Point, Calif. "Now bank TruPS outperform all other CDOs. A lot of banks are 60-100-years-old and have been through a lot - wars, depressions. They can survive."
With spreads on bank TruPS at LIBOR plus 275-325 basis points for primary issuance, slightly tighter than insurance TruPS, "the market is open for the right bank at the right spread, and the secondary market has some values," noted another panelist. The panelists concurred on the values presented by bank TruPS in the market now. They noted, however, that foreign investors can be tough to woo because they have limited information on the smaller American banks issuing the TruPS.
The panelists also suggested the possibility of developing a credit default swap for the TruPS CDO market, similar to ABX and the recently introduced LCDX for collateralized loan obligations. "It's entirely possible to do a CDS to cover TruPS CDOs," one panelist said. "And there is certainly some interest in a CDS and it is a notion people might look to."