New players tap Asian credit

New angles

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A growing number of dealers are setting up or expanding structured credit desks in Asia to tap into the continuing strong demand from Asian investors for synthetic collateralised debt obligations (CDOs).

ABN Amro, Bank of America, HSBC, Barclays Capital and Wachovia Securities are among the institutions that have beefed up their profile in the region, or expanded structured credit desks over the last few months.

Bank of America, for instance, made its first major foray into the Asian market in April, arranging a $1 billion managed multi-sector CDO for Singapore’s United Overseas Bank (UOB) Asset Management (see page 26–27), and the US bank has another deal in the pipeline, expected to close in the coming weeks. According to Goetz Eggelhoefer, managing director and head of global markets Asia, at Bank of America, in Singapore, the firm intends to expand its structured credit coverage model in Asia, with plans to put more resources on both the credit structuring and risk management side in Hong Kong.

ABN Amro, meanwhile, has beefed up its profile in the region over the past couple of months, closing two single-tranche synthetic collateralised debt obligations with Asian investors. In early April, the Dutch bank launched a single-tranche deal for a Chinese financial institution, the bank’s first CDO deal for a mainland Chinese investor, then followed up later that month with a single-tranche equity deal for a Singapore investor.

The first transaction was a five-year deal referenced to 100 investment-grade names with a notional value of $1.8 billion. The Chinese investor, which ABN Amro would not name, invested in a $50 million note rated AA– by Standard & Poor’s. Around 5% of the names in the portfolio are Asian, with the rest split more or less evenly between the US and Europe.

The second deal was a $35 million first loss tranche referenced to a $1.2 billion portfolio of US and European names, which paid a hefty Libor plus 18%. The investor – again, unnamed by ABN Amro – has the right to substitute credits during the five-year life of the transaction. ABN Amro is also working with several Asian clients, with a couple of other deals, including a CDO of CDOs, in the works, says David Crammond, head of structured credit sales, Asia-Pacific, at ABN Amro in Singapore.

Other institutions have been hiring credit derivatives executives, with Barcalys Capital appointing Eric Slighton as its managing director of credit derivatives, Asia, earlier this year, and US bank Wachovia snaring Greg Donohugh from Lehman Brothers to head its new credit derivatives business in Asia. HSBC, meanwhile, has been building up its structured credit platform since the hiring of Harjive Oberoi from Deutsche Bank last year.

“We’re seeing that, increasingly, banks are setting up credit trading platforms in Asian locations,” says Diane Lam, director, structured finance ratings, at Standard & Poor’s, in Hong Kong. “There are a lot of structuring people that are being relocated from the US and Europe to give a big push to this type of product.”

These banks are all trying to tap an ongoing demand for structured credit investments from cash-rich Asian clients, many of which are looking to take on synthetic CDO investments for the first time. There’s also strong demand from Asian asset management companies to manage synthetic CDOs as a means of earning new revenue.

One of the most high profile new entrants in recent weeks is Singapore’s Straits Lion Asset Management, which will manage the portfolio on an Asian credit-dominated investment-grade CDO arranged by Goldman Sachs.

The $1.5 billion reference portfolio comprises a hefty 65% of Asian credits, with the remaining 35% made up of US and European corporates and emerging market sovereign credits. The deal was placed privately with few details available on tranching and pricing, although the structure did include a $10 million–15 million BBB-rated tranche priced at around 200–250 basis points. Goldman Sachs underwrote the equity tranche, with the remaining tranches placed with investors.

It’s the first time Straits Lion has managed a synthetic CDO, although it was named as back-up manager to the Artemus Strategic Asian Credit Fund, a hybrid CDO refernced to a portfolio of CDS and asset-backed securities launched by HVB Asset Management Asia last year.

The Singaporean firm has shied away from managing synthetic CDOs on its own in the past because of the generally low Asian content within the reference portfolios. Synthetic CDOs have typically been structured with around 5–10% Asian content; a function of the low diversity among Asian names, a lack of liquidity in the Asian credit default swaps (CDS) market, and a perceived higher risk of Asian credits among global investors. However, the number of liquid Asian names quoted in the CDS market has risen over the last year, while investors in both Asia and Europe have been keen to increase their exposure to Asia amid strong economic growth across the region.

“There is investor demand for high Asian content CDOs in the market because investors – Asian and European – are looking to Asia quite aggressively,” says Lye Thiam Wooi, head of structured assets at Straits Lion Asset Management in Singapore. “Given the tightness of supply in the fixed income markets, there is good demand for an Asian CDO, with the other 35% outside of Asia giving good diversification.”

The firm has a couple of other deals in the pipeline, and will be involved in managing another synthetic CDO, this time with a lower Asian content, in conjunction with a US asset manager. “We haven’t got experience managing global credits, so we have another manager with us,” says Lye.

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