Details of the four tranches of notes are as follows: $145.1 million of class A secured floating rate notes, rated triple-A by Standard & Poor’s and Moody’s Investors Services, offering 54 basis points (bp)over the six-month London interbank offered rate (Libor); $13 million of Class B secured (interest-deferrable) floating rate notes, rated single-A-minus and A2 at 200bp over Libor; $13 million of class C secured (interest-deferrable) floating rate notes, rated triple-B and Baa2 at 300bp over Libor; and, $45.5 million of unrated secured subordinated notes, on which interest “is payable on an available funds basis out of interest proceeds, subject to prior payment” of debt servicing on the class A, B and C notes, according to the offering prospectus.
Lafayette achieved triple-A rating on its senior tranche due to its priority payment status from coupon revenues on the collateral combined with a financial guarantee insurance policy provided by Ambac Assurance UK.
The option to defer interest on the class B and C notes offers Barep the right to postpone interest payment if revenues from the underlying securities are not enough to cover interest on those notes after servicing the class A notes, without triggering an event of default.
Proceeds from the notes issue will be used to purchase a portfolio of US dollar-denominated sovereign emerging market bonds and collateralised credit default swaps. The target portfolio includes about 33% of Latin American bonds, 26% of Eastern European bonds and 20% of African bonds, according to a Moody’s report. Most of the Asian exposure comes from synthetic securities.
Using cash bonds and credit default swaps was an optimal mix because the synthetic securities offer a taylored profile of the portfolio, claimed Sandra Wong, London-based vice president for structured products at JP Morgan.
James Edwards, head of emerging market funds at Barep, agreed, saying synthetic securities offer flexibility in terms of maturity and deliverable collateral. But synthetic securities will not make up more than 30% of the portfolio. They currently account for about 20% of the portfolio.
According to the prospectus, between 32% and 48% of the portfolio should be floating-rate obligations and between 52% and 68% of the portfolio should be fixed-rate obligations. An interest rate swap agreement is used to protect noteholders against interest rate mismatches.
The week on Risk.net, July 7-13, 2018Receive this by email