Hypo closes hybrid CDO

HVB Asset Management packages together $1 billion of ABS paper and credit default swaps.

HVB Asset Management Asia (HVBAM) has brought to market the first ever hybrid collateralized debt obligation (CDO) managed by an Asian collateral manager. The deal, on which HVB Asia (formerly known as HypoVereinsbank Asia) acted as lead manager and underwriter, is backed by $120 million of asset-backed securitization bonds and $880 million of credit default swaps. Straits Lion Asset Management has been appointed as back-up collateral manager.

HVBAM was established in April 2002 to look after two of Hypo's commercial paper conduits, Maximilian Capital Corporation and Jade Capital Corporation, which have assets of around $1.3 billion under management and are rated Prime-1 by Moody's.

Under the structure of the transaction, Artemus Strategic Asian Credit Fund Limited - a special purpose vehicle registered in the Cayman Islands - issued $200 million of bonds to purchase the $120 million of cash bonds and deposit $80 million into the guaranteed investment contract, provided by AIG Financial Products.

In addition, the issuer enters into credit default swap agreements with three counterparties (BNP Paribas, Deutsche Bank and JPMorgan) with a notional value of $880 million. On each interest payment date, the issuer, after payments of certain senior fees and expenses and the super senior swap premium, will use the remaining interest collections from the GIC accounts, the cash ABS bonds, the hedge agreements, and the CDS premiums from the CDS to pay investors in the CDO transaction.

Around 60% of the assets have Asian exposure, with ABS deals from Korea and Singapore included with those from Japan and Australia. The rest of the assets were originated in Europe and the US.

The transaction was split into five tranches, including an unrated $20 million junior piece to be retained by HVBAM. The $127 million of A-class notes have triple-A ratings from Fitch, Moody's and S&P, the $20 million B-notes were rated AA/Aa2/AA, the $20 million C bonds were rated A/A2/A, while the $13 million of D notes have ratings of BBB/Baa2 and BBB.

Pricing came in at 65bp over three month Libor for the senior tranche and 120bp, 200bp and 400bp respectively on the three other rated tranches. The spreads on the A and B tranches are identical to those on the $63.25 million arbitrage CDO put together last December by Lehman Brothers and PCI Investment Management.

"I would say the pricing is certainly in line with current conditions in the CDO market," says a banker involved on the HVB deal. "Investors like the premium you can get from Asia, and the region is also seen as stable compared to other parts of the world. The mix of ABS paper and CDS got a favorable reaction from investors, and we saw good interest from local clients for the lower rated notes, with European buyers accounting for most of the senior paper."

The banker added that while HVBAM could be expected to bring more CDO issues to market, there are limits on the number of deals it can do. "We have good securitization and credit trading franchises," the banker comments. "CDOs are an obvious way to transfer technology between these two areas. We see the CDO market as part of a long-term business strategy rather than a speculative one-off deal. However, that does not mean we will be able to do four or five deals a year because the Asian CDS market is still limited in terms of liquidity, and that obviously makes it difficult to pool together the size and quality of assets you need to make CDOs work."