BNP Paribas is set to issue a EUR3.25 billion (USD3.03 billion) synthetic collateralized loan obligation in two weeks with a unique predetermined amortization schedule. Paul Mazataud, v.p. senior credit officer at Moody's Investors Service in Paris, said this is the first synthetic amortizing CLO in which the investor enters the trade knowing what the amortization schedule is likely to be. BNP Paribas is structuring the trade to achieve regulatory capital relief on the basket of loans, explained Laurent Lagorsse, asset-backed security syndicate manager at the firm in London. Lagorsse said demand for CLOs is strong right now but supply has slackened since the turn of the year.
The transaction, called Euroliberté, is structured on 202 loans from 160 Western European companies, according to an indicative term sheet dated March 9. The average credit rating of the loans is Baa3/BBB- to Ba1/BB+. For the full term sheet, go to DW's web site http://www.derivativesweek.com/dw/pdfs/Euroliberte.doc.zip.
Lagorsse said 35% of the portfolio amortizes on Feb. 1, 2004, another 35% on Feb. 1, 2006, and the remaining 30% on Feb. 1, 2008. The usual structure is to have a bullet maturity, which allows the bank to terminate the CLO within two maturity dates. Moody's' Mazataud said the amortization schedule means BNP Paribas does not to purchase credit enhancement tools to cover the initial size of the portfolio for the full seven years because the portfolio is designed to shrink.
In the transaction BNP Paribas sells a credit default swap to Euroliberté, a special purpose vehicle, on the 20% of the portfolio most likely to default. The spv then issues five tranches of credit-linked notes. These notes have not been priced yet but Lagorsse estimated the coupon for the EUR260 million Aaa/AAA tranche would be three-month Euribor plus 40 basis points. The EUR140 million Aa3/A-plus notes pay investors 70bps-75bps. The EUR80 million Baa3/BBB-minus notes pay Euribor plus 185bps-200bps. The EUR18 million Ba2/BB-plus notes pay Euribor plus 350bps/400bps.
The notes are callable after 1 1/2 years. BNP Paribas keeps the EUR140 million unrated first loss tranche. The remaining 80% of the portfolio will be sold to a bank via a credit default swap, according to Lagorsse.
