Calyon is working on a synthetic collateralized debt obligation in which the coupon of one of the tranches is linked to the Standard & Poor's 500 and the Nikkei 225. Pierre Trecourt, executive director and Asia-Pacific head of credit-structuring in Hong Kong, said coupons for CDOs have been linked to exposures such as inflation, but the firm believes this is the first to include equity indexes.
"Overall, investors in Asia are still bullish on Japan and the S&P 500 is great for diversification," said Trecourt, adding it provides a benchmark for equities. There is a growing interest in Asia for ABS CDO transactions. "It provides the best return for a quality CDO basket," he added.
The CDO squared, dubbed ABSolute 5, is referenced to a USD2 billion portfolio of AAA ABS and AA synthetic CDO risk. The ABS makes up some 80% of the portfolio. The derivatives house will sell two tranches, a USD20 million AAA tranche and a USD50 million AA slice. Only about half of the AA tranche will offer the equity payout with the remainder linked to a floating-rate coupon. A portion of the initial premium received from the CDO will be invested in equity options in order to generate the equity payout.
The majority of the transaction will be sold in Asia, with regional investment-grade credits making a sizable portion of the 100-name pool in the CDO portfolio. The ABS pool comprises U.S. and European underlyings. Trecourt noted that with interest rates in Asia near historical lows, investors are willing to consider equity returns in anticipation of higher upside potential.
The former Crédit Agricole Indosuez kicked off the ABSolute series early last year (DW, 4/7/03).