DBS in new synthetic deal

The Development Bank of Singapore (DBS) has closed a second synthetic collateralised debt obligation (CDO) following its debut Alco 1 transaction last December, the first balance sheet synthetic securitisation deal in Asia-Pacific.

The aim of the new $129.75 million transaction, which closed in mid-May, is to fund one of the two unfunded super-senior tranches, worth a total S$2.45 billion ($1.37 billion), from the original Alco 1 synthetic CDO (see AsiaRisk February 2002, page 29). Under the new transaction, DBS has shifted the credit risk on part of a reference portfolio of S$2.8 billion ($1.56 billion) in corporate loans onto a special-purpose vehicle, called Spinnaker, using credit default swaps.

Spinnaker will assume credit risk on the portfolio after the loss threshold of S$350.4 million ($195 million), which represents 12.5% of the portfolio, and is made up of the original first-loss portion and six tranched notes issued by Alco 1. In turn, Spinnaker passes on the credit risk to investors in the form of $129.75 million of secured limited recourse credit-linked notes due 2009. The proceeds will be used to finance the purchase of collateral, comprising of seven-year floating-rate puttable notes issued by Abbey National Treasury Services, and guaranteed by Abbey National.

DBS’s initial synthetic CDO in December comprised of two unfunded credit default swaps, which made up the S$2.45 billion super-senior tranche, and six classes of notes issued by special-purpose vehicle Alco 1, totalling S$224 million ($125 million) and rated from triple-A to triple-B. A first loss portion worth S$126 million ($70.2 million) was retained by DBS.

The Spinnaker deal, also a first in Asia, was driven by one of the two counterparties in the super-senior tranche wanting to break out of the deal, and was not prompted by DBS, according to one source close to the deal. “The consequence after the Spinnaker (transaction) closure is that one of the two counterparties (from the super-senior tranche) is out of the picture,” the source says.

An official at DBS confirmed the Spinnaker deal is a result of a change in counterparty, but declined to comment whether the move was initiated by DBS or the counterparty. The name of the counterparty hasn’t been disclosed. DBS is “indifferent” as to whether the tranche is funded or not so long as capital adequacy treatment remains the same, the official notes. The original aim of the Also 1 transaction was to free up regulatory capital within the bank.

The Spinnaker deal is rated triple-Ar by credit rating agency Standard & Poor’s (S&P). The ‘r’ subscript on the rating highlights that the interest amount payable on the notes may vary, S&P said in its rating report.