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Dresdner Throws Net Twist Into High-Yield CLO

Dresdner Kleinwort Wasserstein is structuring one of the first synthetic collateralized loan obligations to be based on a reference portfolio of high-yield loans. The USD1 billion CLO is due to hit the market early next month. Ebo Coleman, v.p. senior analyst in the structured finance group at Moody's Investors Service in London, said the agency has not rated any high-yield synthetic CDOs in Europe but is looking at several transactions and expects at least two to come to market before year-end. Officials at DrKW declined comment.

Investors told DW the structure of the deal is similar to most investment-grade CDOs, but its success will rest on the transparency of the reference portfolio. If information about the reference credits is freely available, they will be happy to participate.

The three-and-a-half year CLO is referenced to drawn-down loans to U.S. corporates. Structurers familiar with the trade said it is a balance sheet transaction designed to remove some of DrKW's credit exposure to high-risk U.S. corporates. The weighted average rating of the portfolio is double-B minus.

Investors can buy into the CLO through five-tranches of credit-linked notes, which are rated triple-A, double-A, double-B and an unrated junior tranche. The senior tranche will be sold via a credit-default swap and DrKW will keep the first loss element. The income on the reference pool is greater than the total payout of the combined securities. DrKW ploughs back the difference, known as the excess spread, into the deal in order to boost the credit rating of the notes. The excess spread is expected to be 2%.

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