Deutsche and UOB launch arbitrage CDO

Two parties target Asian investors for $106.4 million synthetic securitization backed by credit default swaps.

Deutsche Bank and United Overseas Bank (UOB) of Singapore have begun marketing an arbitrage synthetic collateralized debt obligation (CDO), a rarity for the Asian securitization market. Deutsche is acting as arranger and lead manager for the $106.4 million deal with UOB in the role of co-arranger.

Perhaps the most significant feature of the deal is that UOB Asset Management will manage the underlying portfolio, the first time an Asian portfolio manager has done so on a public offering.

Although OUB Asset Management was set to have that status last November on Spectra 1 û a $121.25 million deal backed by $450 million of credit default swaps û the deal got pulled by lead manager and arranger ING on the grounds of poor investor sentiment following 9/11 and the fallout from Enron.

Spectra was split into four tranches rated between triple-A and Baa3 and yields ranging from 45bp to 275bp over three month Libor.

The current transaction û issued by Deutsche's London branch and called United Global Investment Grade CDO-1 û is backed by a portfolio of credit default swaps (CDS) entered into by Deutsche with 148 reference entities. The total notional value of the CDS is $1.33 billion.

All the reference entities û which mainly consist of corporates with a few sovereign and financial institutions also included û are at least of investment grade quality, with the average rating of the entities Baa1. Some 65% of the entities are located in the United States, 29% in Europe with the remaining 6% from Asia.

The portfolio is highly diversified in terms of business types, with 23 different industry sectors included - according to Moody's definitions.

United Global Investment Grade CDO 1, which has a maturity of five years, is made up of four tranches. Moody's and Standard & Poor's have provisionally rated the $26.6 million class D notes A1/A, the $26.6 million E tranche Baa2/BBB and the $13.2 million F class notes Ba2/BB. In addition there is an unrated $40 million equity tranche.

Credit support of 6% for the class D notes comes through subordination on the other three tranches. Consequently, in the event of a credit default, any trading losses will hit the equity tranche first, while any gains will be split among investors in the highest rated D tranche.

An official at Deutsche's structured credit group says the deal was structured to attract a diverse range of investors. "We put the deal together in a way where investors can pick whatever tranche most suits their risk appetite," he explains. "Obviously, buyers that are looking for most yield will be attracted to the equity tranche, knowing that this is also the most risky in the event of any losses."

Although the deal is not being marketed exclusively in Asia, the banker felt that there is now demand for these kinds of sophisticated synthetic products in the region. For a long time, there had been doubt about how much appetite Asian investors would have for bonds that are not collateralized by actual physical assets.

"I believe that at this time there is very strong sentiment for these types of products in Asia," the banker says. "It makes sense because it is a way for them to get a high yielding investment and get exposure to a diverse investment grade portfolio, specially selected by a high quality investment manager."

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