Société Générale and ABN AMRO are separately considering synthetic and hybrid collateralized loan obligations referenced to project finance loans. The SG deal is likely to be referenced to USD500 million of loans on its own balance sheet, whereas ABN is planning balance sheet deals of between EUR200-700 million (USD173-609 million) and customer deals of up to EUR500 million.
Mike Nawas, European head of asset securitization at ABN AMRO in London, said it is looking at transferring the economic risk of part of its project finance portfolio but has not decided whether to opt for a synthetic or a cash structure. He said the firm will likely make the decision in the next two months with the deal coming to market in the fourth quarter if it gets the go-ahead. Nawas said the advantage of a synthetic transaction is it is simpler and there is no problem in transferring the ownership of the loans or disclosing information about the loans to third parties. However there is a lot of uncertainty about how these structures will be treated under the new Basel Capital Adequacy Accord and a cash deal would get around this, as it would undisputedly transfer the risk. Nawas added that it would look at issuing two of these deals a year.
An official at SG said the reference portfolio of its CLO will reflect the firm's project finance portfolio and will mainly consist of loans to power companies, but will also include loans to telecom companies and infrastructure developers. SG will keep the equity tranche, but plans to sell credit-linked notes and credit-default swaps to investors, according to the official. The firm is looking at structuring synthetic CLOs rather than cash deals because some project finance loans do not allow the lender to sell the loan.
Synthetic CLOs on project finance loans have not hit the market sooner because of valuation and settlement problems. In the event of a corporate default the company's debt will remain liquid, but that is not the case with project finance. Also settlement can take two to three years after default on project finance loans, whereas credit-default swaps use a 30-60 day period.
ABN's deal will be a mixture of synthetic protection and the sale of assets because it wants to manage counterparty exposure, which can be done synthetically, and reduce the size of its balance sheet, which cannot be done synthetically, said the company official. The official declined to name the client, but said power companies and telecom companies which have lent money to their clients are natural candidates. He estimated the CLOs could be up to USD500 million.
