Prudential Financial Inc has structured a transaction, Prudential Covered Trust, benefiting from dual recourse to the financial institution and a pool of collateral, although market participants were sceptical about any claim it might have to covered bond status.

The structure involves a unit of Prudential Financial Inc (PFI), Prudential Covered Trust, selling notes, with the proceeds used to buy a pool of residential mortgage backed securities (RMBS) from The Prudential Insurance Co of America and PFI guaranteeing the notes.

Deutsche Bank was the sole structuring advisor, and joint bookrunner with Barclays Capital and Wells Fargo for the $1bn deal, which was launched yesterday (Tuesday).

A covered bond analyst said that calling the issuer a “Covered Trust” suggested that the deal structure was something close to a covered bond, and that this was an unacceptable attempt to associate it with a product that has been extremely successful.

“It requires a lot of imagination to compare this to a covered bond,” he said. “The issuer is an SPV, there is no law and no supervision.”

He pointed out that Standard & Poor’s aligned the securities’ preliminary rating with that of the guarantor despite the pool of RMBS (deposited underlying certificates) having a notional balance of around three times the notional balance of the Class A notes. S&P has assigned a A preliminary rating to the notes.

“It has been presented to Standard & Poor’s,” said the rating agency, “that the cashflows related to the deposited underlying certificates are expected to generate sufficient cashflows to make the scheduled principal and interest payments, as well as the guaranty fee, when due.

“We have not done an analysis of the deposited underlying certificates to verify this presentation.”

A banker away from the deal said it “sounds too exotic to threaten covered bonds” and another referred to it as a “non-story”.

A banker involved in the transaction said the debt was intentionally called Covered Trust notes due to the similarity to covered bonds “as there is dual recourse to company credit and underlying collateral”.

“But in this case the issuing entity is a REMIC [Real Estate Mortgage Investment Conduit], the collateral it owns is legacy subprime RMBS, and the credit support comes in the form of a parent company guaranty,” he said, adding that these features were not customary for covered bonds.

The analyst said that the recourse to Prudential, which constitutes the dual recourse, is at least questionable for two reasons since Prudential is a regulated insurance company governed by the New Jersey state insurance regulator.

“Without claiming to be insurance experts, there might be some interference from the regulator – in case of financial troubles at Prudential – preventing Prudential from exercising the guarantee granted in favour of the SPV,” he said. “Consequently, full collateralisation over the entire lifetime of the bond might also be a challenge.

“We consider it at least worth discussing whether through good times and bad the insurance regulator will allow Prudential to top up or replace assets if need be.”

S&P’s presale report on the debt, including more details about the structure, can be found here (requires S&P log-in): http://www.standardandpoors.com/prot/ratings/articles/en/eu/?articleType=HTML&assetID=1245331025567