Merrill Lynch is in the market with a collateralized debt obligation that is the first of its kind. Taberna Funding I, a roughly $520 million vehicle, is seeking to raise cash and will use the proceeds to buy a diversified portfolio of trust preferred securities from real estate investment trusts. The deal marks the first time the so-called trust preferred technology for CDOs, which pools these securities from small and mid-sized financial institutions and packages them into structured credit vehicles to provide funding for the issuers and diversity for buyers, has been applied to REITs.
Although this deal marks the first of its kind, such a deal has long been expected. Daniel Cohen, president and ceo of Cohen Brothers Financial Management, which is selecting collateral for this deal, told BW in 2003 it was modeling REIT collateral for possible use in CDOs (BW, 9/22/03). His firm has used bank and insurance trust preferred collateral in several CDOs and this is an extension of that model. Cohen and Chris Ricciardi, head of the structured credit group at underwriter Merrill Lynch, did not return calls by press time on this latest deal. Further details on the underlying collateral could not be determined by press time.
One researcher familiar with the transaction said it is noteworthy but expects it will remain a fringe part of the trust preferred CDO market, which itself amounted to only about 9% of all sales last year. "They've used banks, then insurance companies and now REITs. CDO bankers need to generate volume to make money so they are going to try and find new assets," he explained. From a credit perspective, it is unclear how diversified REIT obligations are, he added, though they seem to be less correlated on a national level than borrowers in the insurance sector. "People were worried about insurance companies [TruPs] because they couldn't get comfortable with how they were diversified," he noted.