Merrill Lynch is structuring a synthetic collateralized debt obligation referenced to a EUR1.45 billion (USD1.3 billion) bond investment portfolio of Nationwide Building Society, in what is thought to be the first synthetic CDO entered into by a U.K. thrift. A regulatory change that Nationwide was the driving force behind last summer, allows thrifts to use credit derivatives for risk management for the first time, according to David Williams, equity manager at Nationwide (DW, 6/3).
Williams said it is issuing the securitization and will come to market with follow up deals to reduce credit risk and get regulatory capital relief. The deal is expected to hit the market at the end of May or beginning of June.
The reference portfolio has an average credit rating of A3/BBB plus and the geographic split is 40% U.K., 30% U.S., 3% Australia and the remainder is Western European. The underlying reference bonds are denominated in several currencies--including sterling, dollars and yen--but the investors are receiving euro exposure. However, the regulator will not allow Nationwide to buy protection in a different currency to the bond, according to an official at Merrill Lynch. He said Merrill sells protection to Nationwide to match the obligation. It then buys protection in euros and sells protection in dollars with other interbank players to hedge its currency exposure.
Williams said it chose Merrill Lynch because it offered the most innovative product. However, he added that it would look to do more of these structures and would not use Merrill exclusively.
