J.P. Morgan is structuring a five-year, USD7.3 billion index-linked credit protection product thought to be the first of its kind. The product, which provides second loss protection against default by corporates and sovereigns, will be used by a fund manager as a proxy for credit protection on its fixed income portfolio, according to Oldrich Masek, managing director and European head of structured credit in London. The fund manager chose index-linked credit protection because it is cheaper and more flexible than buying individual protection on each name in its extensive portfolio. He declined to name the fund.
The product, which is linked to a Moody's Investors Service index of 2000 corporates and soverigns, has been named Horizon because of the sheer number of credits it encompasses, Masek explained. The first generation of collateralized debt obligations had static portfolios, the second were managed and the third will be referenced to indices, he predicted. Products based on indices, rather than those that are actively managed, offer greater diversification and circumvent manager bias, he continued.
A structurer at a rival firm said the transaction is impressive because of its enormous size and its innovative structure. He expects to see more of these deals as the know-how spreads to other firms.
In the deal the client retains exposure to the first USD100 million of losses as well as losses after USD300 million. The segment in between is distributed to investors via credit-linked notes rated BBB to AAA. The deal is expected to be priced in the next two to three weeks.
