Cordeiro declined to comment on the super-senior and equity tranches of the transaction, but said: "Only the AAA and AA tranches will be sold into Australia at this stage. The balance of the risk will remain offshore.”
S&P said the preliminary rating of the AAA tranche is supported by the credit quality of the underlying assets, plus credit support provided by the threshold amount under a credit default swap totalling 7.8%, and proceeds from the note issue used to buy medium-term notes issued by ABN Amro. S&P also considered the credit quality of ABN Amro as the credit default swap counterparty, and ABN Amro’s payment of the trust’s expenses other than interest on the notes.
The underlying assets are a portfolio of 55 credit default swaps on investment grade credits. S&P said 50.9% of the portfolio is rated A+ to A- and 40% is rated BBB+ to BBB-. In terms of industry diversity, 14.6% of the credits are financial intermediaries and the rest is spread out across 13 industries.
About 36% of the credits are from the US and 60% from Europe, with Australia and Japan accounting for 1.8% each. “There are insufficient names in the Australian market to create a minimum level of diversification,” said Cordeiro. "Furthermore, we felt international names provided a better return for the relative credit rating at the time of transacting.”
ABN decided to keep the portfolio static, as opposed to managed by a collateral manager, because “a static portfolio was something the investors were comfortable with", said Cordeiro. "They were able to analyse the portfolio where necessary and drew comfort that the analysis they had done would last the length of the deal,” he added.
The Dutch bank said in an eariler statement that the transaction was created due to "Australian originated demand". Cordeiro said total return investors were big purchasers of such structures. "When equity markets are stable or falling, they look for high-yielding but relatively capital-stable products,” he said.
ABN Amro set up its Rembrandt Australia Securitisation Program in June this year, and had already issued three credit-linked notes (CLN) through the program: an A$22.5 million of synthetic corporate bonds linked to Singapore Telecommunications, due May 26 2003; A$30 million of CLNs referenced to US insurer AIG, due July 22 2003; and A$50 million of CLNs referenced to UK telco Cable and Wireless.