Fortis Bank has structured a synthetic collateralized debt obligation embedded with a novel forward-starting management technique and has brought on board Solent Capital Partners, a London-based hedge fund controlling USD4 billion in investments, to run the transaction. Reported by market officials to be the first CDO to reference fixed-maturity credit-default swap but allow re-investment in forward-starting contracts, it is designed to allow a manager to capitalize on any widening in credit spreads, said Etienne Courtois, structured credit product manager at Fortis in Brussels. "This means they can play the steepness of the credit curve and really exploit price risk," said one European structuring official.
Called Regata, in line with a series of Solent deals with sailing names, the CDO references an underlying portfolio of 150 correlated, investment-grade corporates, split into a A to AAA-bucket of eight-year CDS and BBB-bucket of five-year CDS. The three-year maturity mismatch will be managed by Solent, which will re-invest in forward-starting CDS using an overlapping bucket that is empty on day one. For example, in year two Solent can invest in a three-year CDS which kicks-off in three years time. Built-up risk in the third bucket cannot extend beyond 2013.
Inflated returns from any widening in credit spreads will be passed on to investors through a step-up in coupon in year six to eight, which is indexed to the performance of investment, noted Courtois. He added the forward-starting feature also diminishes mark-to-market volatility of the notes and stabilizes the rating of the notes through time. Solent was selected as manager, he explained, because it has the skills and set-up to adapt to the forward-starting feature. Structuring officials at Solent did not return calls by press time.
Fortis is road showing Regata to fund managers, insurers and proprietary desks in Europe, Asia and the U.S. and it will be priced in the third week of December. Target notional is about EUR300 million (USD350 million) and Fortis will issue four notes that have been assigned preliminary ratings of AA to BB by Standard & Poor's. Analysts from S&P and Fitch Ratings said they have fielded inquiries for CDOs with the same forward-starting re-investment period, but Regata is the first appearance of this approach.
