Société Générale is structuring a EUR500 million (USD440 million) five-year synthetic collateralized debt obligation linked to companies in the Dow Jones Euro Stoxx 50. Pierre Matussiere, head of product management for credit derivatives in London, said the terms of the transaction have not been finalized, but investors in the portfolio will likely get EUR10 million of exposure to each of the 50 names in the portfolio. SG expects to back up the portfolio by selling protection on each name in the portfolio in the single-name credit default swap market. With the market uncertain about the future direction of corporate profits, credit default swap levels are wide, offering attractive yields to investors. This environment makes the timing right for such a product, said Matussiere.
SG chose to use the Euro Stoxx 50 as a reference entity for the arbitrage transaction because investors are familiar with these names and satisfied with their credit quality, said Matussiere. The underlying credits in the portfolio have an average Moody's Investors Service rating of A2.
There is no plan to issue credit-linked notes, but Matussiere said if an investor would prefer investing in notes or an insurance product rather than credit default swaps, Société Générale can restructure the part of the product they want exposure to.
Moody's is rating the portfolio as a whole. Matussiere declined comment on the tranching of the transaction. A potential investor said the preliminary structure for the portfolio features a first-loss tranche of 2.4%. A Baa3 tranche takes the next 4% of loss, an Aa2 tranche the next 3.9%, an Aaa tranche the next 2.2%, and a super-senior tranche the remaining 87.5%. This tranching is subject to change, he noted.