CDC IXIS Capital Markets is finalizing a synthetic collateralized debt obligation that incorporates a second-to-default feature with credit and equity risk, which the firm believes is the first of its kind. "In a pure credit-default structure the arbitrage is poor due to the low spreads available, so arrangers are forced to use low quality BBB or BB names," said Brett Clancy, director in credit structuring in Tokyo. "That isn't the case with equity default swaps," he added. CDC has constructed a master CDO comprised 30 second-to-default baskets, in which each basket contains three credit-default swaps and one equity-default swap. The second-to-default feature protects against first-loss risk in each of the baskets, which makes the more volatile but higher-yielding EDS risk more palatable. The underlying credits are roughly split between U.S. and European names, while the equity risk is referenced to highly rated European stocks.
The transaction, which is expected to be launched in the coming weeks, will be sold as single-tranche deals, ranging from Aaa to A1 risk. The firm will manage both the super senior and equity risk in-house. So far, the majority of interest has come out of Europe with a portion being sold to Japanese institutions denominated in yen. The total issuance size will be around EUR250 million (USD303.4 million), but it has the potential to be larger.
Clancy joined in recent weeks from the Royal Bank of Scotland, where he was the Asian head of structuring in Tokyo (DW, 4/28/03), to establish a credit structuring and distribution presence in the region.
