IntesaBci is structuring a synthetic collateralized debt obligation to free-up trading limits and achieve regulatory capital relief on a EUR805 million (USD688 million) reference portfolio of investment grade bonds and loans. Andrea Fabbri, director and deputy head of credit derivatives in Milan, said the transaction is aimed at cautious credit investors, such as insurance companies, mutual funds and banks. IntesaBci deliberately limited the U.S. component of the portfolio to 25% because credit quality is deteriorating faster in the U.S. than in Europe and it wanted a low risk structure. This contrasts with recent synthetic CDOs, Deutsche Bank's Repon 15 and BNP Paribas' Riviera Finance deals, in which over 50% of the portfolios are referenced to U.S. names.
The reference portfolio covers 29 industries and includes names such as Vivendi Environnement, Fortis Groep and Deutsche Telekom. Fabbri said the five-year transaction, dubbed Scala 3, will be split into four parts. Two parts, totaling 92.3% of the portfolio, will be sold off as credit default swaps, 5.3% of the deal will be sold via credit-linked notes and a first loss element of 2.4% will be placed directly with counterparties (see graphic). The credit-linked notes will be split into an A1 rated tranche of EUR24.15 million paying approximately 120 basis points over three-month Euribor, EUR8.05 million in an A3 rated tranche paying 180bps over Euribor and a EUR10.465 million Baa3 rated tranche which will be placed directly with counterparties.
Industry experts said the transaction is defensively structured. For example the portfolio is more diverse than usual, with a maximum industry concentration of 7.5% instead of the more usual 12.5% and no credit rated below Baa3.
Scala 3 is IntesaBci's fourth public synthetic securitization. It structured Scala in November 1999, Scala 2 last December and Leonardo in May (DW, 12/11 and 4/30).
