Banc of America Securities is structuring a synthetic single tranche collateralized debt obligation referencing a $750 million portfolio of leveraged loans, according to Derivatives Week, an LMW sister publication. Single tranche CDOs have mainly comprised credit derivatives referencing bonds, and this could be the first time a bank has used leveraged loans. A B of A spokesman did not return calls.
One reason single-tranche portfolios referencing leveraged loans are not common is due to the illiquidity of loans relative to other credit market products. This also makes it more challenging to delta hedge the tranches, noted an official. It could not be determined how B of A is tackling this problem. B of A is thought to be in the final stages of structuring the deal, which is expected to come out in the next month.