London-based structured credit manager Eiger Capital and Credit Suisse are priming a novel synthetic collateralized debt obligation in which subordination increases are linked to management performance. If the rating of the underlying portfolio deteriorates and there are credit losses in spite of management, a trigger kicks in and subordination levels step up. Other CDOs exist where subordination can increase but the timing of the step-up is specified from the outset of the deal, rather than being based on how the underlying portfolio is managed.
"The step-up feature was implemented to mitigate against rating volatility," said Rajiv Amlani, senior v.p. and head of structuring and trading at Eiger in London. This is an aspect of synthetic CDOs investors are increasingly voicing concerns about and looking to quell, agreed dealers. Eiger is a specialist CDO manager and currently has two synthetic, two cash and a SIV under management. Another structurer noted more of these deals could hit the market this year.
The step-up feature allows the arranger to provide lower attachment points than usual at inception and therefore pay higher returns to investors. If the portfolio sustains a set level of losses, and falls below a set rating, a one-off 1% increase in subordination kicks in and investors receive additional protection against credit loses.
"It is the first step-up subordination transaction that Standard & Poor's has rated based on an average rating trigger matrix," said Vanessa Cecillon, analyst at S&P in London, who noted the deal's A-rated tranche has 3.4% subordination, the BBB 2.3% and the BB plus 1.75%.
Likely to be called Orion Global Synthetic, the seven-year CDO will issue up to USD124.5 million in credit-linked notes and is linked to corporate and sovereign credit-default swaps. It is being presented to institutional investors globally before printing in June. Eiger Capital was set up by Randall Sandstrom in 2002 after leaving LCF Rothschild Asset Management. It has USD3.5 billion under management.