Barclays Capital is offering novel synthetic delta-hedged single-tranche collateralized loan obligations. Other synthetic CLOs so far are believed to have been non-correlation hedged full-capital structures. The challenges have been liquidity of the underlying assets, correlation modeling and call risk associated with European leveraged loan credit-default swap spreads contracts. "I don't know how, but they've achieved the impossible," said one asset manager.
Heikki Monkkonen, head of credit structuring in London, declined comment on the mechanics of the CLO. He said the first bespoke deal printed in November and there is significant investor interest, but added that tightening spreads have made the deals difficult to execute. Single-name LCDS have come in about 30-40 basis points since December and the basis between cash and LCDS has widened to about 70-80 bps.
