Collateralized debt obligation houses are starting to look at private finance initiative loans as the next reference assets for CDOs. Merrill Lynch is believed to be leading the race and is reportedly in advanced talks with DEPFA Bank about issuing an infrastructure PFI CDO. The U.K. national and local governments use PFI loans to get private funding for projects such as hospitals and schools. Officials at both firms declined comment.
Ebo Coleman, originator in structured credit at BNP Paribas in London, said it is studying the possibilities of CDOs for PFI loan originators, including an alternative to traditional, synthetic and true sale securitization for U.K. banks. He declined to elaborate.
He said that one of the reasons firms are turning their attention to PFI loans is because the juice has been squeezed out for the PFI sponsor and they are no longer able to immediately refinance the loan at better rates and shorten the maturity.
Richard Gambel, a managing director in Fitch Ratings structured finance group in London, thinks PFI loans could be an interesting asset class for CDOs because their government link gives them low correlation to each other, high recovery rates and stable cash flows. He added, that the rating agency is working on several proposals. In addition, The Office of Government Commerce (OGC) and Partnerships U.K. have published guidelines to harmonize the terms used in the PFI sector.
