JPMorgan has started marketing a synthetic collateralized debt obligation referenced to a USD1 billion portfolio of investment-grade bonds. The CDO, dubbed AMBER, has an actively managed reference pool, according to potential investors who have seen the preliminary proposals for the deal. It could not be determined who will manage the deal. Officials at JPMorgan declined comment.
The U.S. roadshow for the deal started last week and is expected to come to market within the next month, the investors said. One investor said he is looking to buy CDOs and would be interested in this deal because it has a managed structure. The reference portfolio will consist of at least 100 corporates, including Ford Motor Co. and Dow Chemical.
In a managed portfolio potential losses can be stemmed, whereas in a static CDO the equity tranche is at risk of being decimated after only two or three defaults. For example, if the manager sold protection on Enron at 300 basis points, in a static CDO portfolio the investor would have taken the full hit when the credit defaulted. However, in a managed portfolio losses can be limited by reversing the position, in this case buying protection on the reference credit. This would limit losses to the spread between the price at which protection was bought and sold.
Investors can buy into the deal through three or four tranches of credit-linked notes totaling USD100 million, rated between AAA and BB. The manager will keep part of the equity tranche but the remainder will also be sold, along with a super senior tranche, which will be sold as a credit-default swap. Last week price talk indicated the AAA rated notes would yield three-month LIBOR plus 40-50 basis points and the BB rated notes would be priced at three-month LIBOR plus 300-400bps.
