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Derivatives

Citi Offers Rated Equity Combo Note

Citigroup is marketing in Europe and Asia a managed investment-grade-rated combination note of equity and mezzanine collateralized debt obligation tranches.

Citigroup is marketing in Europe and Asia a managed investment-grade-rated combination note of equity and mezzanine collateralized debt obligation tranches. The seven-year deal, called Elbrus after the mountain in Russia, is managed by EUR1.2 billion London asset managerCredaris.

The note is structured as an alternative to traditional rated equity CDOs, which are becoming difficult to execute as spreads tighten. A number of rated equity deals have been held or changed mid-marketing because spreads tightened from initial ramping. Like rated equity, Elbrus offers exposure to CDO equity and an investment-grade rating, but it is pre-hedged to be less sensitive to spread movement.

Elbrus references a combined portfolio of 165 investment-grade names--with a weighted-average rating of A2 and a seven-year spread of 29 basis points--in a coupon-paying mezzanine tranche and zero-coupon equity tranche for an A3 rating of principal and interest. It offers a zero-coupon internal rate of return of 6.8% and a mezz-linked coupon of 70 bps over LIBOR, to return up to 20% at maturity.

Olivier Renault, structurer at Citi in London, said it has a target size of EUR150 million and is likely to close by the end of the year. Graham Neilson, portfolio manager at Credaris in London, was traveling and did not respond to an email.

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