The often lumbering Resolution Trust Corp. is using some fancy footwork in its mortgage securitization program.

Last week, the bailout agency piqued the interest of foreign investors with some unusual packaging of adjustable-rate mortgages. The rates on the loans are linked to an index of thrifts' costs of funds -- but the payments to securities holders move with the London interbank offered rate, or Libor.

"As far as we know, this is the first deal that involves an interest-index conversion," said Michael Jungman, the RTC's assistant general counsel for securities and finance.

The $580 million package, marking the bailout agency's second mortgage securitization, sold out quickly on Tuesday. Demand came not only from the United States but from Europe and Japan, said Frederick O. Terrell, a director at First Boston Corp., which was lead manager of the offering.

The RTC, which holds about $40 billion of home mortgages through failed thrifts, kicked off its securitization program last month. Known informally as Ritzy Mae, the program is for loans that are either too large or too quirky to sell to the federally chartered secondary market agencies.

The loans backing the latest issue came from three failed thrifts in California: Columbia Savings and Loan Association; County Bank; and Santa Barbara Savings and Loan Association.

As Ritzy Mae approaches its issuance target of $1 billion a month, the interest-conversion feature is almost sure to be used again.

That is because many of the loans of seized thrifts, like those in the latest deal, are adjustables tied to an index of western thrifts' funding costs. And the demand for securities pegged to that index comes mainly from the U.S. thrift industry, Mr. Jungman said.

The RTC's supply of mortgages tied to the index requires the agency to find a broader base of investors, he said. One way to do that is to package the thrift-index loans as instruments pegged to Libor, a favored rate among a variety of institutional investors.

The risk to the RTC is that the thrift index and Libor may diverge in unexpected ways. For example, a sharp rise in Libor relative to the thrift index could leave the RTC paying more to securities holders than it receives from homeowners.

To cover that risk, the RTC is setting up an unusually large reserve fund for the issue. The fund, created with proceeds from the sale, is expected to stand at 20% of the issue, versus 12% for the RTC's first offering of mortgage-backeds.

As an additional safeguard, the rates on the securities cannot rise above 11.5%, well below the caps on the underlying mortgages.

Consequently, the deal is expected to be be graded triple-A by the principle rating agencies.

The largest part of the issue, representing $437 billion in principal, was priced at par to yield 55 basis points over one-month Libor. The securities have an average life of 2.1 years.

Friday's Market

The Federal Home Loan Mortgage Corp. last week offered its first real estate mortgage investment conduit securities backed by Gold balloon reset mortgages.

Borrowers can either pay off Freddie Mac's 30-year balloon mortgages in five or seven years, or keep the loan for the full term at a reset interest rate.

The $200 million offering, sold via Merrill Lynch Capital Markets, was backed by a five-year Gold balloon participation certificates issue with an 8% coupon.

"We put out the word we were going to do this kind of deal Tuesday, so we're really pleased with the quick acceptance," said a spokesman for Freddie Mac.

The eight-piece deal, priced Thursday, includes four planned amortization classes, one targeted amortization class, one floating-rate class, one inverse floating-rate class, and one residual. The transaction settles Sept. 26.

In the corporate market, Caterpillar Inc. served up the day's sole issue following Thursday's $1 billion slate. Most seasoned corporates finished little changed in the secondary market.

Caterpillar, the world's leading manufacturer of construction and material-handling machinery, tapped the 10-year sector with $200 million of noncallable notes. The issue, sold via Merrill Lynch, was priced with a 9.375% coupon to yield 115 basis points more than the Treasury's 10-year note.

The company. which carries an A2 rating from Moody's Investors Service and an A-minus from Standard & Poor's Corp., last turned to bond financing in March, when it sold $250 million of 30-year subordinated debentures as 9.375s to yield 117 basis points more than the bellwether long bond.

In ratings action, Fitch Investors Service placed $4.2 billion of Chrysler Corp.'s senior debt and $12.5 billion of debt at its Chrysler Financial Corp. unit under review for a downgrade.

Fitch, which lowered its ratings on Chrysler and Chrysler Financial last January following similar moves by the major agencies, said the U.S. recession and drop in domestic auto sales have hit Chrysler's financial flexibility harder than it had expected.

A downgrade from Fitch would push Chrysler's senior debt, now rated BB-plus, farther down the junk ladder. Chrysler Financial, meanwhile, whose senior debt is rated BBB and whose subordinated debt is rated BBB-minus, could become a "fallen angel" like its parent.

"Anticipating a recession, Chrysler accumulated a substantial cash position and made a forceful effort to implement a $3 billion cost-reduction program," Fitch said.

But the number three U.S. automaker "used $1.6 billion of this liquidity over the fourth quarter of 1990 and the first quarter of 1991," Fitch said, noting that although Chrysler has moved to conserve cash and spin off assets, the "timing and magnitude" of these actions is still unclear.

Responding to Fitch's action, Chrysler said, "We think it's curious that Fitch has seen fit to put us on alert at a time when the car and truck industry seems poised for a recovery. We're confident that, as Fitch continues to review our programs and plans, it will find no cause to further downgrade Chrysler's ratings."

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