WestLB is ramping up its $1 billion Blue Heron Funding III collateralized debt obligation, says a CDO market participant. The collateral manager will be WestLB in New York, while the notes will be sold out of the firm's New York and London offices. Pricing is expected this week or next week, adds this official. Blue Heron I was priced last October and Blue Heron II, in March. This third series is being customized for an undisclosed European financial institution, which will buy the entire $100 million class B tranche of single-A rated notes. No price talk was available as of press time last Thursday. Tom McCaffery, regional head for global financial markets in New York, declined to comment.
The notes will be backed by a mix of 45% commercial mortgage-backed securities, 43% residential mortgage-backed securities, 7% asset-backed securities and 5% CDOs. Allison Senk, an analyst at Fitch Ratings, says that with its Blue Heron series, WestLB has developed a technology that is a hybrid between asset-backed commercial paper and CDOs. One reason for this is because most of the notes issued are made of short-term paper rated F1+, the highest short-term rating from Fitch. Another factor is the put option embedded in the structure, she adds. If WestLB cannot successfully find buyers within one year for the short-term notes at the exercise price, the bank will be obligated to buy them back at LIBOR plus 70 basis points, retire them and re-issue a new series, she says. Such a structure is highly unusual, yet not unique, says a CDO analyst, who can only think of the Putnam ABS CDO priced last November, as a deal which offers similar features, including the put option.