BNP Paribas plans to issue on Monday one of the first synthetic collateralized debt obligations referenced exclusively to Japanese credits. The JPY90 billion (USD740 million) arbitrage CDO consists exclusively of credit-default swaps on Japanese names and will only be sold to Japanese investors, according to Shun Cajot Yoshida in Tokyo. He added that only two synthetic CDOs have been structured on Japanese names, one of which was an arbitrage transaction by Deutsche Bank but was much smaller and one by J.P. Morgan which was the same size but was a balance sheet CDO. Officials at J.P. Morgan and Deutsche Bank declined comment.
The CDO, dubbed Serena Finance, is referenced to portfolio of 90 credits in 26 economic sectors. The sectors with the largest exposure are industrial engineering and electrical appliances, both of which account for 8.89%, according to the indicative term sheet.
Cajot Yoshida said derivatives houses have not been able to structure a large arbitrage synthetic CDOs on Japanese names before because there were not enough liquid underlying credits. To structure a CDO on 90 credits a firm needs to be able to make prices in at least 120 Japanese names, he continued. He predicted that several firms would come to the market with similar deals in the next few months.
Investors can buy into the deal through four credit-linked notes, rated from A plus through AAA. The most senior tranche of the CDO--representing 81.12%--will be sold as a credit-default swap. Cajot Yoshida said BNP Paribas will likely keep the 4.4% equity tranche but is open to selling it if an investor asks.
To see an indicative term sheet, click here:
