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Derivatives

Danish Manager Offers Novel EM CDO

Sydbank, a Danish emerging market collateralized debt obligation manager, is managing a first-of-a-kind CDO referencing local currency-denominated senior unsecured emerging market debt.

Sydbank, a Danish emerging market collateralized debt obligation manager, is managing a first-of-a-kind CDO referencing local currency-denominated senior unsecured emerging market debt. The USD400 million deal, called Evolution EM CDO, is the first deal to include local currency risk, rather than hedge it out. Sören Rump, portfolio manager in Aabenraa, said local-currency debt in many emerging markets offers better spreads and equity investors stand to benefit further if the local currencies strengthen against the U.S. dollar.

Evolution was issued by Citigroup and rated Aaa through B1 by Moody's Investors Service. Rump said Sydbank chose Citi as arranger because of its access to markets where foreign investors are restricted and for its relationship with Moody's. "It was a challenge to get through the agencies and Citi was the first to solve the problem," he said, noting the issue was one of modeling the deal's fx risk on top of its credit risk.

At the outset, the deal will reference 29 names across Latin America, Eastern Europe, Asia, the Middle East and Africa. Sydbank has the flexibility to reference a diversified global portfolio of up to 50 emerging market credits, all rated by Moody's. Evolution priced last week and will close next week.

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