UBS has closed a novel collateralized bond obligation in Taiwan, referenced to a portfolio of structured interest rate notes. "It's the first ABS in Taiwan dollars that has a foreign asset component and it's the largest CBO in Taiwan's ABS history so far," saidPhilip Tsao, Asia-Pacific regional co-head of debt capital markets and head of risk management at UBS in Hong Kong.
UBS is the arranger, and partnered with domestic bankChinatrust, the originator, for the TWD18 billion (USD541 million) launch. The deal, closed two weeks ago, has been structured to assist bond funds in offloading their structured note holdings, in the wake of a regulatory turnaround on the instruments earlier this year.
The CBO comprises more than 30 Taiwan dollar-denominated structured notes, including inverse floaters, curve steepeners and range accruals with floating rate indexing on such underlying as U.S. LIBOR, constant-maturity swaps, and Taiwan commercial paper. The notes are unwound via interest rate swaps and reengineered into straight floating rate bonds and placed into a special purpose vehicle. To provide diversity as well as enhanced creditworthiness, the deal is 50% linked to the note portfolio and 50% linked to Germany's government-linked KFW AAA rated debt. Two tranches have been structured, a senior AAA rated tranche offering Taiwan commercial paper plus 20 basis points and a BBB minus junior tranche providing a fixed return of over 3.10%, whereas a similarly-rated bond in Taiwan yields around 2.5-2.75%.
The deal follows the move early this year by regulators in Taiwan requiring the widely held domestic bond funds to sell off their structured notes. With interest rates rising, many of the fund holdings had generated losses, which regulators feared could affect NAVs and potentially trigger a run on the funds. As a result, the bond funds have been selling off their structured note holdings to foreign houses, which have repackaged such products to distribute to other investors in the country, such as insurers. Tsao noted the CBO deal allows the bond funds to sell off their structured product holdings at market price rather than at steep discounts, as has been the case thus far.
A fixed-income head at a rival international house said similar types of CBOs have been completed in Taiwan, but concurred that the recent deal was the first to incorporate foreign assets. "CBOs are the hottest issue at the moment," noted the head, adding that his firm has also been looking to launch a similar type of deal.
After this private transaction, which was sold to more than a dozen end investors, UBS is looking at additional deals. Tsao said the firm hopes to launch a public offering north of USD1 billion by year-end.
