Babson Capital Management has closed its first four-currency collateralized debt obligation. The CDO saw demand driven by Asian and U.S. rather than European investors, due to a snowballing of demand in Asia and FAS 155 in the U.S., noted Stephen Olentine, head of product marketing for global structured credit products atHSBC. The firm was sole arranger and placement agent as well as counterparty to the deal's credit-default swaps and total-return swaps.
The USD502 million Maple Hill CDO issued tranches in Hong Kong, Australian and U.S. dollars, as well as euros. Babson decided on multiple currencies to appeal to as many investors as possible, said Matthew Natcharian, managing director and head of Babson's structured credit team. Whereas European investors have driven synthetic CDO demand for the past three years, U.S. real money investors bought a significant portion of the bonds due to the sea change brought about by FAS 155, Olentine said. The change to fair-value accounting for all hybrid instruments removed mark-to-market on-balance sheet accounting, which had deterred many investors because of the volatility it added to balance sheets. In addition, Asian investors continued their strong demand for synthetic CDOs seen over the past 18 months, he added.
The deal is backed by a portfolio of single-name CDS on 125 mostly investment-grade credits. The proceeds from the notes were mostly invested in AAA collateral, generally structured paper. The deal is more highly levered than other synthetic deals due to the high quality of the collateral as well as changes to Standard & Poor's CDO evaluator 3.0, Olentine said. S&P was the sole agency to rate the deal.
As TRS counterparty, HSBC receives the return on the highly-rated assets while paying out a floating interest rate. The bank also pays the protection premiums in the CDS, making up the spread the notes pay. The bespoke tranches were issued out of different vehicles in various geographic locations and closed on dates from early to mid-August. Most of the tranches were issued with a AA rating. Pricing for the AAs ranged from 110-120 basis points over LIBOR or the fixed-rate equivalents.