The Royal Bank of Scotland has structured a CMBS securitization with a synthetic component rarely seen in the U.K. The seven-year transaction is the fifth arranged by RBS in its flagship USD1.5 billion EPIC conduit, but the first to feature a portfolio credit-default swap which links investor losses to the performance of a pool of U.K. commercial property loans.
Market players said the synthetic tweak is common in German securitizations, due to the country's tax and accounting laws, but is uncommon in Britain. Structuring officials at RBS did not return messages by press time and reasons for adding the CDS element could not be determined.
In the trade, Epic Ayton, an off-shore special purpose vehicle, will enter a CDS on a portfolio of five commercial property loans held by RBS, including three in central London. RBS as counterparty will make quarterly payments to Epic which will fund, in part, interest payments to holders of seven classes of floating-rate notes. The notes pay three-month sterling LIBOR plus a margin and have been assigned preliminary ratings of AAA to BBB by Standard & Poor's. The swap protects RBS against defaults on the loans and any losses in the reference pool will be allocated to each class of notes in reverse order, from F-class upwards.
The remainder of proceeds to investors will be generated through a GDP535.3 million RBS deposit account, set up by Epic from the sale of the notes, as well as repo securities purchased from RBS with the account. The account and repo securities also act as collateral in the transaction. The deal is being road showed to investors and is expected to close this month.