UBS Warburg is structuring its first trust-preferred collateralized debt obligation--the $500 million deal Spirits Trust CDO, which is set to price this month. The collateral of this CDO consists of trust-preferred securities issued by insurance companies, not banks. There has been only one other CDO deal of that--the I-PreTS, which came in December, says Sajjad Hussain, a Fitch Ratings analyst who specializes in this asset class. There is no collateral manager for this static pool transaction. Calls to Gina Hubbell, managing director and CDO structurer at UBS, were not returned.
Insurance companies, such as banks or thrifts, securitize trust-preferred securities for tax and risk-based capital ratio benefits just as banks do, says Hussain. Trust preferred securities allow them to obtain capital relief as those securities are treated as equity not debt from a regulatory standpoint. For CDO investors, buying into a collateral of trust preferred securities that are issued from a different type of institutions than the traditional bank or thrift, offers greater diversification.
The notes will be backed mostly by new issues of trust preferred securities. A pool of 40 different small and mid-sized insurance companies will issue the trust-preferred securities securing the notes.