The deal will be the first publicly offered synthetic CDO to be managed by an Asian fund manager, after the cancellation of a deal by ING Barings earlier this year. The Dutch bank came to the market last November with a $450 million synthetic CDO called Spectra, which was to be be managed by Singapore’s OUB Asset Management. But the deal was pulled in the first half of this year after the bank failed to place all of its tranches with investors.
The Deutsche Bank deal, called United Global Credit Grade CDO 1, consists of three unfunded super-senior credit default swaps making up 92% of the portfolio. The mezzanine portion consists of $106.4 million of credit-linked notes in three tranches; $26.6 million of class D notes rated A1 by rating agency Moody’s and A by Standard & Poor’s; $26.6 million of class C notes rated Baa2 and BBB; and $13.3 million of class F notes rated Ba2 and BB. Meanwhile, the first-loss portion represents 3% or $40 million of the portfolio.
Of the underlying portfolio, 6% comprises Asian names, while 65% is made up of US names, with Europe accounting for the remainder. But despite the small Asian component, the deal is aimed primarily at Asian investors, said Kelvin Wong, director of structured credit at Deutsche Bank in Singapore. “One of the attractions of this product is to offer Asian investors an efficient way of diversifying to the investment grade asset class outside Asia, with a portfolio manager helping to select the credits and managing it on an ongoing basis.”
UOB Asset Management will be able to trade the underlying assets, meaning that if an Enron-type default emerges, the manager will be able to switch that credit for another name. However, the proportion of Asian names is not allowed to exceed 7% of the portfolio, while the replacements may not exceed 13% of the initial portfolio notional amount. In addition, the aggregate loss – defined as the sum of the credit protection amounts plus the trading losses and minus the trading gains - must not exceed 50% of the first-loss tranche.
In an added benefit to the investor, any trading gains generated by the Singaporean firm will be added to the nominal amounts of the notes, up to their initial outstanding nominal amount, by order of seniority. Any trading losses, however, will be subtracted, from the most junior tranche upwards.