Japan’s SMBC expects to issue synthetic CLO in early December

Japan’s Sumitomo Mitsui Banking Corporation (SMBC) is preparing to launch a synthetic balance-sheet collateralised loan obligation (CLO) referenced on ¥500 billion worth of loans extended to 1,500 Japanese small to medium-sized companies.

Two classes of credit-linked notes are to be issued by special-purpose vehicle Proton, as part of the synthetic CLO. Class A, worth ¥10.5 billion, was assigned a prospective rating of (P)A2 by Moody’s Investors Service and Class B, worth ¥7.5 billion, was rated (P)Baa3. The notes are expected to be issued on December 13 and will mature on November 30, 2005. Pricing is expected to be set between December 3 and December 6, said a spokesman at the bank.

He added that SMBC will "pass on the default risk [on the loan portfolio] to investors using derivatives". In other words, SMBC will enter into one or several credit default swaps to transfer the risk of its loans to investors. The bank declined to comment on the size of the super-senior swap. The spokesman also declined to give details of the equity tranche.

Goldman Sachs, which is co-underwriter, is the credit swap counterparty. Daiwa Securities SMBC Europe is the other co-underwriter for the transaction, which will be privately placed.

The SMBC spokesman said he did not know how much capital SMBC will be able to release as a result of the synthetic CLO. Japan’s regulator, the Financial Services Agency, has yet to formulate any official regulatory capital treatment of synthetic balance-sheet CLOs, currently preferring to rule on a case-by-case basis.

SMBC’s proposed transaction is the second synthetic balance-sheet CLO in Japan following Mizuho’s ¥1.265 trillion deal sold in September. SMBC's deal comes amid growing concern about the future of the country’s banking sector as the government tries to push for restructuring, urging the banks to clean up their balance sheets.