Lehman Brothers in Asia has launched a single-tranche synthetic collateralized debt obligation with an extendable feature in a bid to boost returns. "It's purely for yield enhancement," said Leon Hindle, senior v.p. in Hong Kong, noting the proliferation of extendable and callable features embedded in CDOs due to the current tight-spread environment.
The deal, dubbed Beryl Finance Series 2006-10, and rated AAA by Fitch Ratings, is referenced to a USD14.31 billion portfolio comprised of a 155 default-swaps with USD114 million in credit-linked notes being structured. In the transaction, originally targeted for three-years, Lehman has the right, not obligation, to extend the length of the transaction to a final maturity of seven years. As Lehman is the credit protection buyer, it would look to extend the deal out if spreads go wider, effectively allowing it to pay protection at locked-in cheaper levels than available in the market.
Hindle added the deal will be sold to a mix of investors via direct sales and third-party distributors in Asia.