Goldman Sachs and Singaporean asset manager Straits Lion have joined forces to complete Straits Lion CDO I, a $1.5 billion managed synthetic collateralized debt obligation. The CDO comprises 100 single name investment grade corporate credits in the form of credit default swaps, 65% of which are Asian names, with the rest coming from US, Europe and other emerging markets.
The product will have a seven-year lifespan with a call option after five years. "The transaction represents the first synthetic CDO to have predominantly Asian names in the underlying portfolio," says Lye Thiam Wooi, Straits Lion's head of structured assets.
Chul Chung, Goldman's regional head of credit structuring, notes that CDOs with a high concentration of Asian names have often put pressure on the overall credit rating of the portfolio, making the transaction uneconomical. "We overcame this structural constraint by being very deliberate in our portfolio selection to ensure a wide diversification in Asian credits across industries and countries," he comments. "In addition the five-year call and extension of maturity enabled us to structure an attractive transaction."
Straits Lion will be actively managing the CDO portfolio during its lifetime. "This is another attractive feature, as synthetic products are usually static," says Wooi. "We'll be able to maximize benefit as we can trade the names in our portfolio."
Wooi says the deal is proving attractive to global investors looking for spread pick-up and diversified exposure to Asian credits. "The Straits Lion CDO mezzanine tranche offers a 200bp to 250bp spread on triple-B notes," he says. "This compares very favourably with spreads available on triple-B credits throughout the region."
Goldman's Chung adds, "Market sentiment towards Asia is very positive. The region experienced low default rates in 2003, and cyclical expansion has been gaining decisive momentum in 2004."
He also notes that Asian investors are more likely to feel comfortable with the product given their familiarity with the names in the underlying portfolio. Commenting on the partnership with Straits Lion, Chung says, "Straits Lion has a lot of experience and expertise in managing Asian credits. We're proud and honoured by the strength of our relationship with them."
Straits Lion's executive director Norman Ip adds, "Straits Lion has been involved in CDO investments since 2001. We've reached our first milestone managing structured fixed income assets and we'll continue to work on innovative CDO structures focusing primarily on Asian assets."