Asian role for Solent's Centris

A round up of this week's structured credit news

Asian role for Solent's Centris
HSBC has closed US$200m-equivalent worth of Centris notes, a principal-protected long/short credit CPPI managed by Solent Capital Partners. The transaction is noteworthy for being structured and coordinated out of Asia.

The deal references mezzanine tranches of the iTraxx Europe and DJ CDX investment grade credit indices and comprises notes denominated in US dollars, euros and New Zealand dollars with maturities of seven to eight years. The US dollars-denominated paper pays a contingent coupon with a modeled return of approximately 9.25% per annum.

The aggregate of the long and short positions is credit-event neutral on a cash basis, while having the benefit of substantial positive carry and roll-down. This feature is expected to result in an attractive risk/return profile for investors.

In addition to the core index tranche strategy, there is flexibility for the manager to use single name CDS, indices or tranches – thereby allowing Solent access to more efficient hedging tools to capture return for investors. HSBC assumes the gap risk by providing principal protection within the dynamic leverage framework.

Jamie Spence, head of structured credit product marketing Asia Pacific for HSBC notes: "Centris offers investors the opportunity to participate in a managed strategy that captures the relative value currently available in the credit curve between the five-year and 10-year indices, together with the comfort of principal protection. In partnering with Solent, we provided our client base with the combination of a top-tier credit manager and an investment with enough flexibility to allow the manager to perform under differing market conditions."

"Given the nature of this opportunity, Centris is ideally suited to Solent's management style," adds Ray O'Leary, partner at Solent Capital. "By understanding the factors driving changes in the price of protection in investment grade indices alongside traditional management of synthetic CDOs, Centris allows investors to access the structural alpha offered through this construction with the benefit of a manager to police potentially hazardous events which could impair the monetisation of that value."

HSBC's client footprint in Asia, where a significant part of the transaction was sourced, proved to be an ideal springboard to distribute the structure.

More CDPC activity
Cournot Financial Products (see also SCI issue 28) has been rated by Fitch and Channel has teamed up with Principia in the past week.

Fitch has assigned a triple-A issuer default rating to Cournot Financial Products, addressing the credit derivative product company (CDPC)'s ability to make timely payments as required to counterparties.

Cournot is expected to sell credit protection mainly on highly-rated tranched corporate exposures. At least 50% of the company's aggregate notional exposure with respect to all outstanding CDS transactions will be allocable to reference tranches that meet a triple-A threshold. The vehicle will be managed by Cournot Capital, a subsidiary of Cournot Holdings – which is in turn a subsidiary of Morgan Stanley.

Cournot will only engage in activities permitted by its operating guidelines, which specify portfolio guidelines, eligible transactions, eligible counterparties, eligible investments and required capital. A proprietary capital model is used to determine Cournot's required capital. Failure of capital tests and certain breaches of the operating guidelines can lead to restrictions in Cournot's ability to sell additional credit protection.

On Tuesday it was announced that Principia Partners had joined up with Channel Capital Advisors. Principia's SFP system will manage transactions from deal capture and risk management through compliance reporting for new CDPC Channel Capital plc.

The CDPC will principally write credit protection on AAA rated tranches of portfolios of corporate and sovereign obligors. Channel Capital plc is expected to be efficient even in current tight credit spread market conditions due to its use of a multiple-tranche capital structure, a low velocity business model, and other operational and structural enhancements of its business model.

REIT TruPS CDOs to withstand HEL volatility
The latest chapter in the sub-prime mortgage market slowdown is likely to present a fairly minor problem for US REIT-specific TruPS CDOs since the majority of their collateral comprises residential mortgage loans, according to a new report by Fitch Ratings.

Though research by the rating agency shows that REIT TruPS CDOs account for approximately 13% of the entire TruPS CDO arena, Fitch md and REIT group head Steven Marks says that the inclusion of residential mortgage obligor TruPS in portfolios has actually declined over the last two years. "Spreads have tightened and the yields on the TruPS are not cost-effective for issuers," he explains.

Exposure to sub-prime residential mortgage lenders represents only 8.4% of total residential mortgage lender exposure within REIT TruPS CDOs and hybrid CDOs. Furthermore, exposure to sub-prime residential mortgage lenders represents only 1.8% of total REIT TruPS collateral included in REIT TruPS CDOs and hybrid TruPS CDOs.

Nonetheless, Derivative Fitch senior director Nathan Flanders notes that the agency continues to actively monitor the sector and how it may affect transaction risk. "There have been no deferring or defaulted residential mortgage company entities in any Fitch-rated TruPS CDOs to date," he observes.

Banque AIG in SIV launch
S&P has assigned preliminary A-1+/AAA ratings to the senior European and US CP and MTN programmes of Nightingale Finance, the latest SIV to come to the market. Banque AIG sponsors the vehicle and will provide it with investment services; certain aspects of treasury execution and operational support will be provided by QSR Management.

Nightingale can issue up to US$25bn senior US and European CP and MTN notes, as well as US$5bn triple-B rated capital notes. The vehicle will use the proceeds of the issuance of the notes to purchase a portfolio of securities following predetermined portfolio guidelines.

Lion Capital Management brings CDO pair
Singapore-based asset manager Lion Capital Management is in the market with two synthetic CDOs – the US$30m Sukhothai CDO 1 and the A$112.7m Zircon Finance Series 2007-1.

The triple-B plus rated Sukhothai transaction will be issued via Calyon's Queenstown CDO vehicle and comprises a funded single tranche referencing a US$3bn portfolio of 115 investment grade global obligations, with an average rating of A minus. The US and Western Europe account for the majority of the portfolio, with 60.1% and 31% of the exposure respectively.

Meanwhile, Zircon Finance (also known as Coolangatta) comprises A$84.05m double-A rated Class A notes and A$28.6m triple-B rated Class Bs. The deal references a 7.5-year portfolio of 150 predominantly investment grade corporate entities, with a weighted-average rating of A-/BBB+.

Arranged by Lehman Brothers, the notes are callable in March 2011. Should this occur, the collateral securities will be delivered by the issuer to the swap counterparty in return for a cash settlement, thus shielding the noteholders from market risk on liquidation of the portfolio.

CBOE to launch listed credit default options
The Chicago Board Options Exchange (CBOE) plans to launch credit default options based on credit events during the second quarter of 2007, followed by credit default basket options soon. The instruments will provide the opportunity to hedge the risk of adverse credit events, such as bankruptcy and failure to pay.

"CBOE's credit default options will bring great benefits and tremendous cost-savings to a market that has exploded into a US$26trn business. CBOE's product will provide investors with the advantages of a standardised, exchange-traded options contract, including the assurances of SEC oversight, triple-A rated clearing, increased price transparency and reduced trading costs. In addition, CBOE credit default options will trade on our highly successful hybrid trading system," comments CBOE chairman and ceo William Brodsky.

The instruments are cash-settled binary call options that pay US$100,000 when the exchange confirms that a credit event has occurred. If no such credit event occurs, the option expires with no value. Special procedures would apply in the event of a succession or redemption.

Derivative Fitch launches Vector 3.1
Derivative Fitch has launched an updated version of its VECTOR default model for CDOs, focusing on ease of use and including enhancements to the automated data loader for corporate reference entities.

The new version of VECTOR includes a CDO comparator, which enables users to quantify the impact of portfolio substitutions on the rating loss rate, default rate and recovery rate of the initial portfolio. In addition, a more sophisticated matching engine has been added to the Vector Reference Entity Feed to facilitate better communication between the Fitch feed and users' proprietary feeds.

MP