First sale of equity tranche from residential mortgage-backed synthetic

The German financial services regulator, Bundesanstalt für Finanzdienstleistungsaufsicht (BAFin), is expected to impose new capital adequacy rules this month. According to many dealers, it is likely that retention of the equity piece of a synthetic securitisation will require a risk weighting of at least 100%. German property bank Aareal’s deal with PMI Europe will therefore allow it to avoid any such future capital charge.

Dublin-based mortgage risk management specialist PMI Europe provided $62.1 million of credit protection in total, of which $8 million is for the first-loss, or equity, piece of the $1.8 billion Provide Home 2002-1 synthetic securitisation.

The transaction met Aareal Bank's strategic and risk management needs effectively, said Peter Schott, Wiesbaden-based head of syndication and securitisation at the German property bank. It was assisted in its structuring of the deal by Deutsche Bank.

The deal’s structure is multi-legged: first, Aareal used default swaps to transfer the credit risk in the reference pool of mortgages to the German development bank Kreditanstalt für Weideraufau (KfW) - which has a zero risk-weighting due to its quasi-sovereign status – to get capital relief.

KfW then bought protection from Deutsche Bank through default swap trades and also sold credit-linked notes – rated by both Standard & Poor’s and Fitch - direct to investors. Finally, via a Bermuda-based special purpose vehicle, Deutsche entered into default swap trades with PMI Europe. “Our business is all about putting residential mortgage risk onto our balance sheet and managing it,” said Tony Porter, Dublin-based executive managing director at PMI Europe.

On average, there are around two residential mortgage-backed synthetics securitisations per month in Europe. This is Aareal Bank’s second securitisation deal with KfW. As part of the Provide Home programme, Aareal securitised residential mortgages worth €1.5 billion back in December 2001.

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