BNP Paribas to launch managed synthetic CDO in Japan

“I think it would have been difficult to sell the managed transaction two years ago, but now the Japanese investors are pretty sensitive to portfolio transactions,” Shun Cajot Yoshida, senior structurer in the credit derivatives department at BNP Paribas in Tokyo, told RiskNews. “Investors that have already bought the static type of transaction know that it is quite difficult to rely purely on the ratings approach when you invest over a duration of five years. So I think the appeal of the managed transaction was really in line with the demands of the investors.”

The transaction, called Full Moon Finance Limited, is referenced to a portfolio of 70 Japanese credit default swaps, each with a notional amount of ¥2 billion. The mezzanine portion is divided into five tranches of notes, rated by Japanese ratings agency Rating & Investment Information. The Class A notes, worth ¥8 billion, are rated AAA; while the remaining AA+, AA-, A and BBB- notes are all worth ¥2 billion each. The unfunded super senior tranche represents ¥120 billion or around 86% of the portfolio, and the equity tranche totals ¥4 billion. BNP Paribas will manage the risk on the super senior and equity tranches.

Unlike many of the managed portfolios to emerge in Europe and the US, DIAM will play a purely defensive role in managing the portfolio, with a number of strict guidelines in place to limit the number of trades conducted each year. Most notable is that a portion of the firm’s management fee remains in a trading cash account throughout the life of the transaction. Any trading or credit loss incurred on the portfolio is deducted out of this account first, giving an extra layer of subordination to noteholders. In other words, if the portfolio performs badly, DIAM loses a significant portion of it management fees, providing a huge incentive for the firm to protect the reference credits.

“The strategy of management that DIAM is providing for the portfolio is purely defensive,” added Jun Shibata, senior structurer, credit derivatives, at BNP Paribas. “It’s really a back up for noteholders so they know that the underlying names in the portfolio are being monitored throughout the life of the transaction during the current volatile credit environment.”