European investment houses, such as UBS Warburg and Dresdner Kleinwort Wasserstein, are reportedly looking at structuring the first collateralized debt obligation referenced to portfolios of debentures, according to officials familiar with the transactions. Debentures are the U.K.'s precursor to asset-backed securities, with the major difference being the assets remain on the balance sheet of the issuer giving the investor a senior claim in the case of bankruptcy. These deals are expected to be around GBP1 billion (USD1.47 billion). One official said the deals are being prompted by client demand to remove these assets from their balance sheets. Officials at UBS declined comment.
The CDOs would likely be referenced to 30-year debentures issued in the 1980s which pay a high coupon, said Darren Smith, co-head of CDOs at DrKW in London. However, one of the drawbacks to these deals is that debentures are rarely traded and therefore hard to value. In addition, most debentures were issued by property companies or investment trust, with a few from industrials, meaning the portfolio will not be diverse. But, Smith said the high credit quality of the portfolio means diversity may not be a problem.
These deals could attract new investor types to the CDO market, such as commercial mortgage backed security investors, said one rival structurer in London.
