Has TPG Credit Uncovered A Loophole To Raid CDO Assets?
Bloomberg highlights an interesting development out of CDO land, where TPG Credit is in the process of attempting to raid quality assets in a TRuPs CDO at the rip off price of 5 cents on the dollar, while bribing the first loss tranche: the CDO equity holders, with a moderate take out fee. If this is a broad loophole in which the equity tranche, which in most cases is out of the money since even the highest-rated slices are trading at 40-50 cents on the dollar in most CDOs, can determine the fate of CDO dispositions, expect many other funds to join TPG in raiding any and all good assets making up comparable CDOs. As there is roughly $650 billion in CDOs outstanding, they have quite an extensive selection to pick and choose from.
A TPG Credit Management LP fund offered Oct. 9 to buy $115
million of bank trust preferred securities for 5 cents on the
dollar from Tropic CDO V Ltd., according to a trustee report
obtained by Bloomberg News. TPG Credit will pay holders of so-
called equity portions another $5.75 million to allow the sale,
the document says. Equity holders have the right to decide which
assets the CDO sells because they’re first in line for losses.
Tropic CDO V’s equity holders may no longer have the
incentive to ensure that assets are sold at fair value because
their investments were wiped out by the worst financial crisis
since the Great Depression. That may allow TPG Credit, a
Minneapolis-based firm founded by former Cargill Inc. executive
Rory O’Neill, to cherry-pick the best assets and erode senior
holders’ collateral, according to John Scannell, chief operating
officer of New York hedge fund Hildene Capital Management LLC.
In essence TPG is providing tip value to the decision makers who don't care either way what the fate of the asset below above them is, so long as they get even minor compensation for an investment that had been previously considered a total loss. In this light, it is easy to see why holders of higher-rated CDO tranches should be very concerned about the confiscation of their collateral at bargain basement prices:
“The 5 percent offer per security seems low and likely
counter-beneficial to all or almost all noteholders in the deal,
with the possible exception of the equity investors,” Gene
Phillips, a director at advisory firm PF2 Securities Evaluations
Inc., said in an interview from his New York office. “If this
were allowed to go through, it would seem to be against the
spirit of the deal, which aims to protect the senior
As the administration is doing all it can to rekindle the securitization market, this should be a big flashing light: the last thing needed is investors figuring out how to abuse comparable loopholes not only in the existing securitization universe but also for any such planned offerings in the future. And without some form of securitization vehicle coming to the rescue of CREs over the next 2-3 years, look for the loans we discussed earlier which banks have on their books still at 95 cents and above to turn very ugly quick.