BNP Paribas launches Australian dollar synthetic CDO

The three-and-a-half-year transaction, Bond i Trust 2003-1, is referenced to 90 underlying Australian, European and US credits, with Australian names accounting for 15% of the portfolio.

The deal consists of two tranches of rated notes worth a combined A$60 million (US$40 million). The A$40 million of Class A notes are rated AAA by Standard & Poor’s, while the A$20 million of Class B notes are rated AA.

Investors in the Class B notes are protected against the first 3.7% of aggregate losses on a portfolio notional reference amount of A$1.33 billion and have exposure up to a cap of 5.2% of losses on the portfolio. The Class A noteholders are protected on the first 5.2% of losses on a portfolio reference amount of A$2.67 billion, up to a cap of 6.7% of aggregate losses.

The transaction is aimed at Australian investors keen to invest in a diversified credit structure but unwilling to take on currency risk by investing in US dollar-denominated transactions, said Guillaume Dieu, director of credit derivatives structuring, Asia-Pacific, at BNP Paribas in Hong Kong.

“There is definitely growing interest in Australia for this type of product, but one of the wishes of investors is for a domestic structure, because they don’t want to bear the currency risk," he said.

There have been a few attempts to get an Australian dollar-denominated credit default swap (CDS) market off the ground in the past - Australia’s CDS market is still overwhelmingly US dollar-denominated. This meant BNP Paribas had to manage the currency risk through embedding a quanto within the structure. Dieu said: “For most of the [underlying credits], there is not a liquid Australian dollar market, so we have to manage the quanto risk."

Interestingly, both tranches of notes can be increased in size after the deal has closed, depending on the level of investor demand. “We can issue further notes that are fungible with the exiting notes, so it’s pretty flexible," Dieu added. "Depending on demand, we can increase the size."

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