The Royal Bank of Scotland is road showing in Europe first-of-a-kind capital-protected notes referencing the U.S. synthetic ABS indices. They have been structured on the back of European investor appetite for absolute-return strategies and the returns in synthetic ABS, according to Alberto Thomas, head of credit derivatives structuring, and Greg Wall, credit structurer. Constant proportional portfolio insurance will be used to protect capital invested.
Rival firms had yet to digest details of RBS's offering and reactions to the deal were mixed. Some officials expressed surprise RBS is the first to bring a synthetic ABS CPPI to the market. "It's early days for the indices and I'm surprised there is enough liquidity," said one structurer. The underlying reference is ABX.HE which was launched Jan. 19 and is a suite of five indices rated AAA through to BBB minus, each consisting of 20-25 credit-default swaps referenced to U.S. residential mortgage-backed securities.
A trader at a U.S. firm in London, however, said he thinks liquidity is deep, with dealers steadily putting through trades on the AAA-rated index with notionals of USD50 million and above.
Thomas said RBS expects volumes of ABX trading to grow and as a market maker the firm is comfortable with liquidity and its ability to price this structure. The firm is targeting institutional investors who want exposure to the U.S. home equities market, but don't have the knowledge or freedom to do it on a cash basis. Most of these clients, however, are already familiar with the CPPI concept. Credit CPPI has been this year's flavor with houses including Société Générale Corporate & Investment Banking, Calyon Nomura and Barclays Capital bringing deals to the market.
Investment in RBS' transaction, called C-SHELLS, is being offered in U.S. dollars across five-, seven- and 10-year tenors.