PIMCO is in the process of raising a transatlantic collateralized loan obligation that purchases assets in three currencies and also issues liabilities to match to create a perfect hedge. The deal is believed to be the first CDO with liabilities across three currencies. "Many CDOs can invest in other currencies, but they usually address foreign exchange risk with asset specific swaps," said Jerome Cretegny, a Standard & Poor's analyst. "This is the first PIMCO CDO to address the FX risk by combining a natural hedge and portfolio hedge. To my knowledge this is only the third CDO in the market to have a natural hedge and this is the only one with liabilities in three currencies."
Deutsche Bank is the underwriter for the deal, which is approximately E300 million and is called Clarenville CDO. A PIMCO spokesman declined comment and a Deutsche Bank spokeswoman did not return calls.
PIMCO sees this CDO as a transatlantic deal, with a majority of assets in Europe, said Cretegny. The target portfolio at end of ramp-up will already have 20% in U.S. dollars and 14% in British sterling, he said. "In terms of strategic reasons, PIMCO wants to diversify the portfolio," he added. If there is not the type of assets in the European market, they can draw from the U.S. and sterling, which provides more flexibility, he noted. A E145 million AAA, a $55.5 million AAA tranche and a GBP23 million tranche will be issued, according to S&P. The lower-rated liabilities will be issued in euros.
The target portfolio is overwhelmingly loans, but the vehicle also has 10% mezz loan and 5% high-yield bond buckets. This is much more restrictive than the 30% permitted in their first leveraged loan European CDO, Intercontinental, Cretegny added. But PIMCO also has a lot of flexibility to invest in credit shorts securities, which are synthetics where the CDO buys protection.