German cooperative DG Bank is considering using credit derivatives to structure two EUR100 million (USD94.5 million) synthetic collateralized debt obligations. It hasn't ruled out buying the underlying bonds in the cash market, but probably will use credit default swaps because the spreads are more attractive, says Detlef Giebe, head of corporate and bank bonds trading in Frankfurt.
The CDOs likely will be structured by selling protection on each of the credits and passing this on to investors via credit-linked notes. One of the CDOs will be on a basket of telecom names and the other will be on a basket of autos. Both CDOs will have three-year maturities.
Each of the baskets will consist of four credits. The content of the baskets has not been finalized. Giebe said the bank chose three-year maturities because the credit spread has widened for this maturity.
Investors will be able to buy into the deal through credit-linked notes. The telecom CDO will pay 150 basis points160bps over three-year Euribor and the auto CDO will pay 110bps 120bps over three-year Euribor. Giebe anticipates demand for the CDOs will come from member banks and German-based institutional investors.
