Merrill Lynch and Banca Commerciale Italiana have structured a synthetic securitization based on a USD1 billion reference basket of airplane loans, in what is widely thought to be the first deal of its kind.
Burkhard Heppe, v.p. structured credit products at Merrill Lynch in London, said synthetic CDOs have not been structured on airplane loans before because of the complexity of the structure of the loan portfolio. In this transaction, named after Leonardo da Vinci, BCI buys credit protection from Merrill Lynch on a USD1 billion portfolio of 130 loans to 30 airlines.
To isolate the credit risk of airlines repaying the loans, rather than the risk of the SPV defaulting, the credit protection only pays out if bankruptcy of the SPV is preceded by the airline not repaying the leases.
The synthetic CDO has a legal maturity of 2019 and is expected to come to market in the next two weeks, according to Heppe. The reference portfolio contains loans to airlines including British Airways, KLM Royal Dutch Airlines and Air France. BCI has a call option that gives it the right to cancel the deal after five-years and a regulatory call option if there is a change to the proposed Basel Capital Adequacy Accord after three years.
Seventy-eight percent of the deal consists of a super senior tranche, rather than the more typical 85%-90% for multi-industry CDOs, because the average rating of airline companies is lower and the portfolio is less diverse, Heppe explained. Normally synthetic CDOs are structured from portfolios with an average rating of single-A, but this has an average rating of double B plus. The remainder of the CDO is split into five tranches. Triple-A rated notes make up 5% of the deal and will pay approximately 45 basis points over Euribor, 7.5% of the transaction is double-A rated notes which will pay about 70bps over, 3% of the transaction is single-A rated and will pay 115bps over. There is also a 3.5% triple-B rated tranche, which will be sold as a credit default swap, and a 3% first loss tranche, which Merrill Lynch and BCI keep.
