As part of the transaction, Shield is selling the floating-rate CLNs to investors. Proceeds from the CLNs are invested in “authorised investments” consisting of AAA-rated residential mortgage-backed securities and A-1+ rated short-term securities. Shield is also selling protection on the portfolio of 100 credits to CBA which pays Shield a quarterly swap premium for the credit protection.
At the same time, Shield is entering into a basis swap with CBA, whereby Shield receives a quarterly floating rate interest payment with which it pays the CLN noteholders’ quarterly interest. The basis swap also allows Shield to get protection against market value, re-investment and basis risk on the authorised investments. In return for the basis swap protection, Shield pays CBA the interest payment from its authorised investments.
This is the second series of portfolio CLNs CBA has issued through its Shield vehicle. The first four series, worth a total of A$159.2 million, were issued in June. Shield, which was launched in March this year, has also issued repackaged notes and single-name CLNs.