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Trups redemption clause will boost CDOs, says Moody's
Tuesday, August 24, 2010
The three-month window for banks to redeem their trust preferred securities in the Dodd-Frank law will be positive for trups CDOs in terms of default risk, according to Moody’s. In a recent report, the rating agency says that around $2.8 billion , or 7%, of trups CDO collateral could be redeemed as a result of the law change. The redemption window applies only to bank holding companies that have more than $15 billion of assets.
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CFlux secondary
CLO index levels:
| Index | 6 Feb |
|
| CFlux USD AAA | ↑ | 94.9 |
| CFlux USD AA | ↓ | 81.3 |
| CFlux USD A | ↓ | 75.0 |
| CFlux USD BBB | ↑ | 74.8 |
| CFlux USD BB | ↑ |
72.1 |
| CFlux USD EQ | ↑ | 67.6 |
If anything, the effect is neutral to negative on CDOs because the banks affected by Dodd-Frank's elimination of TruPS as Tier One capital represent the best credits in these pools. Resulting redemptions will reduce excess spread and weaken the overall credit quality of TruPS pools.
Larger issuers have stronger incentive to redeem their TRUPS, subject to the economics of such decision. This should boost up amortizations and is positive for deals containg TRUPS of large sound banks, effect that must've been priced in by now anyway...
Agreed - I can't see how this can be positive for the CDOs, since only the stronger issuers are going to be able to redeem their debt.
Does that mean that the 93% of remaining trups are from issuers who could not redeem and therefore credit impaired?