Société Générale Asset Management Alternative Investments is set to manage a collateralized debt obligation with a feature allowing gains from a trading account in the CDO to sop up losses from defaults. Dubbed Algebra, the 10-year CDO is available in two different note classes, issued by SG Corporate & Investment Banking. The firm is offering USD70 million notes rated A2 and EUR50 million notes rated Aa3 and other currencies are also available.
The U.S. dollar notes give the investor extra protection against defaults in the portfolio, by including a 1.5% step up in subordination to 6.5% at year five. Also at year five, the issuer has the right to buy back the notes in the event of spread tightening. The step up was included because defaults are expected to start occurring by year five.
The balance of the 10-year CDO's trading account--for most classes of notes--is split 75% to the investor and 25% to the manager. Béatrice Benhamou, responsible for structured credit in France at SG CIB in Paris, explained this is important because it aligns the manager's interest with that of the investor. She said it is difficult to say how much the trading account feature may boost returns compared with a standard 10-year deal because this depends on the substitutions made by the manager.
The deal came about as a reverse enquiry from a client to SG and the firm proposed SGAM AI as the manager. Officials at SGAM AI could not be reached for comment by press time.
