Public Debt Gets Juiced Synthetic Treatment

Synthetic securitizations referencing private finance initiative debt are set to swell following the launch of EPIC II, a EUR900 million (USD1.1 billion) transaction by Dublin-based public finance firm DEPFA BANK.

  • 23 Jun 2006
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Synthetic securitizations referencing private finance initiative debt are set to swell following the launch of EPIC II, a EUR900 million (USD1.1 billion) transaction by Dublin-based public finance firm DEPFA BANK. PFI is a government- or public authority-run program to acquire private financing for public sector infrastructure, also known as public-private partnership.

The asset class is being buoyed from both the buy and sell side: banks want capital regulatory relief on their PFI assets and investors want exposure to an asset class seen as comparatively safe and a high-yielding form of ABS. "We certainly get a lot of inquiries for packaging this type of risk," said Jonathan Manley, analyst at Standard & Poor's in London. "Banks want to recycle capital and further invest in this sector which is continuing to grow."

Joerg-Andreas Duurre, a v.p. in the securitization department at German bank KfW which is sponsoring EPIC II, said the deals are the only way to get exposure to PFI or PPP loans for some investors.

Until now, only two synthetic PFI deals have been launched: DEPFA's EPIC I, a GBP391 million securitization of U.K. PFI loans last summer, which priced at 40 basis points over LIBOR for the AAA tranche, and a similar transaction by Sumitomo Mitsui Banking Corporation in January. EPIC II is a market first in that it references global infrastructure assets, including projects in Australia, Japan, Portugal, Spain, Sweden and Ireland. An official close to DEPFA said its first deal was snapped up quickly and there is strong demand for the second showing.

In the structure, KfW provides credit protection on the risk associated with the financing of 32 infrastructure projects DEPFA holds on balance sheet. In turn, KfW will hedge exposure through issuing EUR100 million of credit-linked notes to the capital markets and a EUR800 million senior credit-default swap to a separate protection buyer, which is believed to be monoline Assured Guaranty. It is currently being road showed to European institutional investors, including banks, hedge funds and insurance companies, and will be priced early July.

Officials at DEPFA, Assured Guaranty and arranger Merrill Lynch either declined comment or did not return calls by press time.

  • 23 Jun 2006

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