Prudential Investments is the latest manager looking to raise equity for Citibank's pro rata collateralized loan obligation that enables bank debt managers to invest in revolvers and "A" loans. Citibank worked with TCW to come up with the hybrid cash/derivative structure that was unveiled last year.
The partially funded synthetic structure reduces the weighted-average cost of the liabilities, overcoming the major problem of investing in unfunded assets (LMW, 2/3/03). PIMCO and Highland Capital Management have since followed. A Citibank spokeswoman and officials at Prudential did not return calls.
According to market participants, other banks have looked into ways of coming up with their own version but are being held back for a couple of reasons. "The bank has to be willing to take the super-senior tranche," said a portfolio manager. In a typical $500 million transaction, Citibank retains an almost $400 million super-senior tranche. "It really is an investment in the balance sheet," said the manager.
Having a funding arm to keep the loans on the balance sheet is an issue, said a CDO analyst, who noted that investment banks are particularly limited in this respect. Another problem is one of credit ratings. Citibank as arranger, underwriter, and swap counterparty is rated AA/A-1+. Total return swap counterparties and any other synthetic counterparties must have a short-term rating of A-1+ from Standard & Poor's. "This is not a liquid total return swap. It's $500 million with loans," said the analyst.