Bank of America Corp. and Morgan Stanley are teaming up to bid on $7.49 billion of commercial-real estate securities held by the Federal Reserve Bank of New York, joining the ranks of dealers pooling resources to win the assets, according to people with knowledge of the auction.
The banks today distributed price estimates of about 60 cents on the dollar, said the people, who declined to be identified because the transaction isn’t public. The debt is composed of two collateralized debt obligations issued by Deutsche Bank AG and assumed in the rescue of American International Group Inc. Final bids are due on April 26 by 9 a.m. in New York, said the people.
The New York Fed invited eight broker-dealers to compete for the so-called MAX CDOs after receiving “several” unsolicited bids for the holdings in its Maiden Lane III LLC portfolio, according to an April 10 statement. Citigroup Inc., Credit Suisse Group AG and Goldman Sachs Group Inc. are preparing a joint bid as well, people familiar with the plan said yesterday. The other banks invited to bid are Barclays Plc, Deutsche Bank and Nomura Holdings Inc.
The CDOs could be sold intact or broken into pieces. An interest-rate swap contract with Barclays would need to be paid out to access the underlying bonds, eating into profits, according to JPMorgan Chase & Co. Deutsche Bank, which owns the most junior slices of the CDOs, would need to be bought out to break up the CDO, according to people familiar with the deals.
Barclays has circulated a proposal to investors for a so-called re-remic, which would enable the bank to create AAA rated bonds with pieces of the CDOs, according to one of the people. About 44 percent of the securities are rated below investment grade, while 8 percent carry top rankings, JPMorgan analysts said in an April 13 report.
The two CDOs, which bundle securities culled from 103 commercial-mortgage bond deals, are estimated by the New York Fed to be worth $4.8 billion as of December, according to the district bank’s website.
Renee Calabro, a spokeswoman for Deutsche Bank, and Brandon Ashcraft, a Barclays spokesman, both based in New York, declined to comment.
Maiden Lane III, with a face value of $47.7 billion, was estimated to be worth $17.8 billion as of December last year, according to the Fed’s website. In addition to commercial-mortgage CDOs, the holdings include $12.7 billion in CDOs backed by other assets.