CIBC World Markets is buying assets for a EUR800 million ($720 million) CDO, backed by a pool of European bonds and loans, as the European CDO/CLO market continues to develop. According to Bondweek, an LMW sister publication, the CDO will be managed by London-based Duke Street Capital, a private equity buyout shop. Some assets have been warehoused, and the manager is aiming to have 50% bought by the start of May when the deal closes. The deal, which is scheduled to price at month-end, is part of a wave of European CDOs signaling the market is finally starting to take off: first quarter CDO flow this year topped $15 billion, against the $2.5 billion recorded in the same quarter last year, according to Standard & Poor's.
CIBC is the sole underwriter for Duchess I CDO S.A., the Luxembourg-incorporated special purpose vehicle (SPV), and Deutsche Bank is the trustee. The structure is divided into three tranches, one triple-A tranche, one BB-tranche and one equity tranche, with an average maturity of 10 years. Most of the underlying assets are sub-investment grade and consist of a mixture of bank loans, mezzanine loans and high-yield debt securities. This is the first time Duke Street initiated a CDO, and as a sponsor it holds some of the equity. CIBC officials declined comment. A Duke Street official was unable to comment by press time.
Duchess is a regular cash-flow arbitrage CDO deal, which aims to exploit the spreads between the yields on the assets (receivables) and costs due to bondholders and the servicing of the debt.
"The CDO formula is a proven product in the U.S. and is starting to spread around," said Henry Albulescu, director CLO/CDO with Standard & Poor's. The vigor of CDOs and CLOs in Europe is due to a variety of reasons. Brian Gordon, director CDO/CLO with Fitch IBCA, says European banks use the benefits of CLOs because they're facing increasing competitive pressure due to the march toward a single European market. "How to obtain capital relief, maximize yield spreads, manage the balance sheet and compete with the Citibanks and other giants of the world? CLOs fit nicely with those needs," he explained. He adds that in a high-yield European market still in its infancy, both CDOs and CLOs are also appealing to the yield-hungry investor.
Among other deals in the market, is a partially-funded synthetic deal by BNP Paribas called Euroliberty, for EUR3.75 billion ($3.37 billion) for the reference pool of assets, and EUR629 million ($566 million) for the funded portion of the assets. Unlike the Duchess deal, the UBS EuroLiberty is a CLO synthetic transaction designed for capital relief purposes, as most bank-originated transactions are in Europe, because the physical sale of assets is complicated by the differing laws across Europe.