Previous Story Next Story
PREMIUM CONTENT
Regular in-depth analysis, in addition to SCI’s usual news stories
To continue, you need to upgrade your subscription to access this article and all Premium content reports.
Existing Subscribers contact The SCI Sales Team
Not yet registered?
A round up of this week's structured credit news
Clutch of CDO rarities hit the market
The extent of the flexibility of CDO technology was on full display last week, with a variety of unusual underlyings being offered to investors, including hedge fund collateral, equity default swaps (EDS) and subordinated insurance debt.
First off the blocks, was the EUR116.5m RMF Four Seasons CFO - only the second CDO in Europe to reference hedge fund collateral - through IXIS CIB. The portfolio is invested in units issued by RMF Fund, which comprises 182 hedge funds with a NAV of EUR12bn and is managed by its RMF Investment Nassau branch. The capital structure includes four classes of rated notes and unrated zero coupon notes: all but the triple-A tranches are rated to ultimate interest and principal, with the triple-As rated to timely interest and ultimate principal. A number of structural features of the transaction address the issues associated with hedge fund investments that have historically made the asset class difficult to securitise, such as the risk associated with uncertain performance, liquidity and redemption rights of investors.
Morgan Stanley has become the latest dealer to bring an EDS transaction to market, with the launch of its so-called Corporate Portfolio Trigger Securities. JPMorgan tapped the sector first with a private transaction in 2004, while Credit Suisse was soon to follow with its CEDO programme.
At US$2m, the size of the new deal - as registered with the US Securities and Exchange Commission - has led some market participants to speculate that a larger portion of issuance may have been sold privately. The seven-year notes reference 100 North American stocks, with payment at maturity linked to the number of entities that experience a trigger event over the life of the transaction.
A trigger event will occur if the closing price of a stock falls below 85% of its initial value or if the referenced entity goes bankrupt. The final payment amount reduces in equal portions for every trigger event until portfolio has experienced five events, at which point investors receive nothing.
Meanwhile, spread guidance was offered on the EUR300m Dekania Europe CDO II, only the second transaction to be backed by subordinated hybrid instruments issued by European insurers (which otherwise would have difficulty accessing the capital markets). Merrill Lynch arranged the deal, which will be managed by Cohen Brothers' affiliate Dekania Capital Management.
The EUR165m and EUR30m triple-A rated Class A1 and A2 notes were talked at 40bp area and 55bp area over Euribor respectively. Ratings on these notes address timely interest and ultimate principal, while those of the deal's other tranches - ranging from double-A to double-B - address the ultimate payment of cumulative interest and principal. Up to 25% of the pool may comprise perpetual instruments.
Surf's up
ABN Amro has launched Surf, the constant proportion debt obligation (CPDO) structure mentioned in last week's edition of SCI. Surf aims to give fixed-income investors fully rated and leveraged exposure to the main credit derivatives indices.
ABN says the product is designed to appeal to investors who want exposure in a form that is not directly affected by correlation volatility, who may require high certainty of principal and coupon payments, or those who wish to diversify their structured credit portfolio and look for alternative sources of liquidity.
Indeed, Steve Lobb, global head of credit and alternative derivative marketing at ABN, expects the new structure to have a similar impact on the market as the introduction of synthetic CDOs did. "The absence of a full rating has made it difficult for investors to assess the risks and appropriately place dynamically leveraged credit products into a portfolio. By creating the CPDO with a full rating for the timely payment of both principal and interest, we have solved this issue for our institutional investors and broadened the asset choice available to managers of credit portfolios."
Although Surf has a combination of synthetic CDO and credit CPPI features, it won't take exposure to the correlation risk associated with CDS. It is rated triple-A by Standard and Poor's and pays a coupon of 200bp over Libor.
The size of the portfolio is adjusted dynamically, so that the CPDO only uses the leverage it needs in order to make scheduled principal and interest payments. The structure of the product is designed to carry a stable rating with a high likelihood of "cashing-in" to a risk-free investment.
Malaysian SME CLOs on the horizon
News that Malaysia's central bank is preparing for the securitisation of SME loans made by local financial institutions has sparked speculation about the development of a CLO sector in the country. Plans are also being implemented to relax the environment for foreign institutions focusing on the SME segment.
The central bank has greatly improved the viability of small and medium enterprises - which account for around 99% of businesses in the manufacturing, service and agricultural sectors - in recent years, including the introduction of an interest subsidy for institutions that lend in the segment. Opening the market to the securitisation of SME loans will provide local institutions with the opportunity to transfer lending risk off-balance sheet.
Preferred CDS index to launch
An index of CDS on preferred securities is set to start trading next month. The new index, dubbed PCDX, will be managed by the CDX credit derivatives index consortium, which currently includes indices of CDS on high-yield, investment-grade, cross-over and emerging market credits. It is being modeled on the CDX.IG.HVOL index and will replace the Lehman Brothers PDX index, which began trading last September.
The composition of the PCDX index is not expected to be decided until about a week before its launch. But it is likely to include between 40 and 60 names.