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Derivatives

BNP, Deutsche Bank, J.P. Morgan Line Up Japanese CDOS

BNP Paribas is planning to issue one of the first synthetic collateralized debt obligations referenced to portfolios of Japanese credit-default swaps this week and Deutsche Bank and J.P. Morgan are hot on the French bank's heels with similar deals lined up for the first quarter.

BNP Paribas is preparing to issue a JPY90 billion (USD735 million) arbitrage CDO, dubbed Serena Finance, which consists exclusively of credit-default swaps on Japanese names and has only been sold to Japanese investors, according to Shun Cajot Yoshida in Tokyo. He added that only two synthetic CDOs have so far been structured on Japanese names. One of these was a JPY20 billion arbitrage CDO structured by Deutsche Bank and one by J.P. Morgan, which was similar in size to Serena Finance but was a balance sheet CDO. Officials at J.P. Morgan and Deutsche Bank confirmed the deals.

An official at J.P. Morgan said the firm plans to come to market with a deal likely in a range between JPY80-100 billion. The firm is looking at structuring the CDO now because of a widening in credit spreads, caused by deteriorating credit quality in Japan and the economic fallout of the Sept. 11 terrorist attacks in the U.S. An official at Deutsche Bank said it had not decided the size of its transaction, adding that it would respond to investor demand. The higher the credit quality of the underlying portfolio the fewer credits it would need. The official also noted that some clients prefer to deal with portfolios of 30-40 names--rather than a portfolio of 100 names--as they will likely be more familiar with each credit.

Cajot Yoshida said derivatives houses have not been able to structure a large arbitrage synthetic CDO on Japanese names before because there were not enough liquid underlying credits. To structure a CDO on 90 credits, like Serena Finance, a firm needs to be able to make prices in at least 120 Japanese names, he continued.

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.

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