We expect other banks that participate in the tender-option bond market to utilize similar structures for new TOBs in the second half of the year. For existing TOB trusts, banks may unwind the trusts and create new joint venture trusts or may potentially use a third-party non-banking entity as a sponsor to make those structures compliant.
In a typical TOB structure, the sponsor will deposit a fixed-rate bond or note into a trust that then issues one floating rate certificate (with a tender option) and one residual certificate. Tax-exempt money market funds may buy TOBs as the floating rate certificate's tender option is often issued by the sponsor, shortening the maturity of the deposited bond.
The Volcker rule, which is expected to be fully implemented by July of 2015, prohibits banks from sponsoring the trust and providing any liquidity, credit, or remarketing services for the floating and residual certificates issued by traditionally structured TOBs.
The new structure establishes a joint venture trust that the liquidity provider, the floating interest holders, and the residual interest holders join. Each joint venture must have 10 or fewer parties. Joint ventures of this size were exempted from the Volcker Rule.
Additional information is available on www.fitchratings.com.
The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article, which may include hyperlinks to companies and current ratings, can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings.
U.S. Public Finance
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Source: Fitch Ratings
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