A first for Singapore

Deutsche Bank has launched the first synthetic collateralised debt obligation (CDO) to be managed by an Asian asset manager, Singapore’s UOB Asset Management.

The structure will allow UOB to actively manage a reference portfolio of 148 investment grade names from Asia, Europe and the US, with investors able to directly benefit from any trading gains made by the Singaporean firm. At the same time, any trading losses incurred will also be passed on to investors.

The $1.33 billion 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, to be managed by Singapore’s OUB Asset Management. However, the deal was pulled after the bank failed to place all 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 ratings agency Moody’s Investors Service 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. The underlying portfolio comprises 6% Asian names, while 65% is made up of US names, with Europe accounting for the remainder. Nonetheless, despite the small Asian component, the deal is aimed primarily at Asian investors, says 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 of Asia, with a portfolio manager helping to select the credits and managing them on an ongoing basis.”

UOB 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.

One potential sticking point, however, is the firm’s lack of experience in managing global credits. UOB has managed 10 cash CDOs in the past, but only two have been investment grade portfolios, with the rest made up of emerging market and Asian deals. Yet, the dominance of US investment grade credits within the portfolio will not be an issue, says Tay Teck Chye, director of global treasury at UOB in Singapore. “We’ve got investment experience in high yield Asian credits,” he says. “We feel investment grade credits are much easier to manage because the information flow is much better than high yield emerging markets in Asia. So we don’t think that is necessarily a disadvantage.”

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 notes of the most junior tranche upwards. Already, the Singaporean firm has its eyes on another managed synthetic deal, which is likely to be arranged by a rival US bank, according to a source close to UOB. NS