Trust‐Preferred CDOs
Douglas J. Lucas, Laurie S. Goodman, Frank J. Fabozzi, Rebecca J. Manning · 2012
Trust-preferred security-collateralized debt obligations or TruPS CDOs are unusual in many respects. This chapter defines underlying trust preferred securities and describes the issuance trends and structural features of TruPS CDOs. TruPS CDOs exist in a niche, with issuance only a small portion of U.S. CDO issuance. They provide diversity from the usual asset classes represented in CDOs. The chapter shows how rating agencies use historical data in determining their trust-preferred default, recovery, and diversification assumptions. It also shows how trust-preferred collateral has performed within seasoned CDOs. TruPS CDOs usually have reserve funds and auction calls of collateral after 10 years. Recent TruPS CDOs allow limited trading. Rating agencies look at historical default studies to determine their assumptions regarding TruPS CDO collateral defaults, recoveries, and diversification. TruPS CDOs appeals to CDO investors seeking wider spreads and looking for diversification away from traditional CDO assets.