Mizuho to launch ¥1.27 trillion CuBic One synthetic CLO

Mizuho Corporate Bank, a unit of Japan's Mizuho Holdings, is launching a ¥1.27 trillion ($10.4 billion) three-year synthetic balance sheet collateralised loan obligation (CLO), via special purpose vehicle CuBic One Limited. Mizuho International and Merrill Lynch are joint bookrunners.

The transaction comprises five funded tranches with preliminary ratings from Moody’s Investors Service from Ba2 to Aaa. The super senior credit default swap, worth around ¥1 trillion, has also been assigned a Aaa rating by Moody’s and AAA by Standard & Poor’s (S&P).

The mezzanine tranches consist of ¥125 billion of class A notes rated Aaa by Moody's; ¥29 billion of class B notes rated Aa2; ¥38 billion of class C notes rated A2; ¥20 billion of class D notes rated Baa1; and ¥30 billion of class E notes rated Ba2. The unrated equity portion is worth around ¥28 billion. The expected maturity date is April 28, 2005 and legal maturity is September 30, 2005.

In a statement, S&P said that “the swap counterparty is expected to also enter into a mirror credit default swap with third-party investors. The effect of these two swaps is that the ultimate investors will take on the credit risk of the pool of Mizuho Corporate Bank’s loans in excess of the ¥266 billion threshold amount.”

Mizuho’s proposed transaction is the largest synthetic CLO to be issued in Japan. The CLO is based on a pool corporate loans extended by Mizuho to about 150 companies, a large portion of which are railway and utility companies.

Market participants in Tokyo not involved with the deal hailed it as a step forward in Japan’s synthetic securitisation market. “It’s great that something like that is happening in Japan. It’s obviously going to encourage others. It also means that the regulators have studied the subject and they’re comfortable with it, which is also very good news,” said one banker.

Merrill Lynch declined to comment.