Société Générale is planning a securitization of project finance loans, looking to join only Credit Suisse First Boston and Citibank as banks that have managed to execute project finance-backed collateralized loan obligations. The bank is looking to bring the deal to market within the next few months, according to Power Finance & Risk, an LMW sister publication. SocGen officials declined comment, so the geographical and sectoral mix of the loans could not be determined.
Banks see project finance CLOs as a way of freeing up their balance sheets, allowing them to do more business, and also as a means of reducing credit exposure to particular sectors or names. A handful of banks have looked at issuing project finance CLOs. But when they realize the time and expense involved they have backed away, said John Kunkle, senior director at Fitch Ratings in Chicago. "When banks start down that path they realize it's an incredibly time-intensive and expensive process," he says. Deutsche Bank is among those to have stepped back, by shelving a planned $500 million vehicle called Odyssey Funding (PFR, 12/17/00).
The chief expenses are the structuring and legal fees, and rating charges are also high, said Sam Fox, a senior director at Fitch. Because there is limited diversification in the underlying loans, the agencies tend to look at each component loan. Another factor making the deals tough to place is they generally require a critical mass of $1 billion to make the fees worthwhile. This size, and the fact some of the loans are sub-investment grade, means the equity tranche is larger than in a typical CLO. As a result, it can be tough to place all the equity, Cox said.