Britannia Building Society has synthetically hedged exposure to GBP130 million (USD243 million) of asset-backed securitizations in what market watchers say is a first-of-a-kind transaction in that it covers potential drawdown of reserve funds. In the deal, the U.K. thrift has bought credit-default swap protection on the reserve funds associated with the first-loss piece of seven cash RMBS securitizations it originated between 2003 and this year. The swap is triggered if the underlying notes do not meet note-holder payments.
"The idea to hedge against drawing on reserve funds is quite interesting and novel," said Jasmina Koleva, analyst at Standard & Poor's in London, noting this is the first time a non-conforming issuer has bought protection on cash reserve funds via a synthetic CDS. A similar securitization called Whinstone was issued by fellow U.K. thrift Northern Rock last November, and tapped again this year, but this referenced standard or prime residential mortgages.
Counterparty to the GBP103 million (USD193 million) CDS is an Irish special purpose vehicle called Dovedale, which will in turn transfer risk to third-party investors by issuing a series of floating-rate notes. These notes are currently being road showed to investors, but target buyers and notional could not be immediately determined as treasury officials from Britannia did not respond to phone and email messages. The deal was arranged by JPMorgan. Structurers at the U.S. house referred calls to the press office where Stephania Fignorelli, spokeswoman, declined comment.
