BNP Paribas begins issuing synthetic CDOs in Asia

The bank, which started developing arbitrage synthetic CDOs in Europe and the US a couple of years ago, plans to structure arbitrage synthetic CDOs to meet investor appetites in Asia. "It's kind of a logical evolution," said Guillaume Dieu, director and head of Asia Pacific synthetic securitisation at BNP Paribas.

While most of Asia's credit derivatives market is not as developed as Europe or Japan, Dieu believes there is sufficient liquidity in the market to build tailor-made portfolios. These are then targeted at local banks looking to diversify their portfolios with US and European risk, and local subsidiaries of European or US institutional investors trying to take on Asian exposures. "It's a very cost-effective way to get exposure to this market without having to build the whole portfolio," he added.

The bank's first synthetic CDO transaction, likely to be worth $1 billion, will be issued in the next three to six months, with the possibility of more transactions of similar size over the year.

The reference portfolios will consist of credit default swaps on Asian, Australian, European and US names, sold to investors as credit-linked notes with a maturity of five years. BNP will structure the issue into tranches rated BBB+ or A-, AA and AAA, and plans to retain the equity segment.

The French bank will primarily target Asian investors, especially from Australia, Korea, Singapore and Hong Kong. "But obviously it can meet the investor appetite elsewhere," added Dieu.

However, synthetic CDOs are relatively new to the region, with the first deal only transacted at the end of last year - a S$224 balance sheet synthetic collateralised loan obligation from Development Bank of Singapore. But Dieu expects demand to increase as investors begin to understand the risk/reward profile of such instruments.

Dieu transferred from Paris in September last year as part of the bank's efforts to boost its synthetic CDO capabilities outside Europe.