The deal is very different to the S$224 million ($121 million) synthetic collateralized loan obligation (CLO) being arranged for DBS by JP Morgan. This deal is designed to allow DBS to manage its capital adequacy ratio more efficiently and is not a funding exercise, whereas the ING and OUB transaction is completely market driven and it has an asset pool of non-physical assets.
Believing that there is a gap in the market for this product - in Asia at least - ING and OUB set about buying a portfolio of credits, packaging them together and then selling them to investors.
Unlike a typical CLO or collateralized bond obligation, where a portfolio of actual loans or bonds back the securitized notes, the underlying pool in the ING deal is made up of credit default swaps between the special purpose vehicle - called Spectra 1 - and 90 non-sovereign entities.
These reference entities have a weighted average rating of Baa1 from Moody's, and none fall below investment grade. Almost two thirds of the entities are located in the US, and a limited number are from Hong Kong.
The transaction was split into three rated and one unrated tranche, all of which have expected maturities of five years. The $83 million class A notes are rated triple-A and will pay 45bp over three month Libor. The $13.5 million class B notes, rated Aa3, will pay 75bp over and the $14.625 million mezzanine notes, rated Baa3, offer 275bp over Libor.
Credit enhancement will come from $10.125 million in subordinated bonds, which will pay investors any excess interest. It is also thought that the large size of the reference pool in comparison to the amount of notes issued should provide easily enough cover in case of a few negative credit events.
A banker from the structured products team at ING Barings strongly believes that Asian investors are ready for this sophisticated type of product, although he stresses that it is being marketed globally. "The deal was driven by investor demand," he says. "Asian investors will be among the buyers as they do have knowledge about this product. They understand securitization deals and essentially this transaction is very similar to normal ABS, the difference is that the pool of assets was created synthetically through credit default swaps.
"The deal was structured to cater for a wide range of investors, from those limited to buying triple-A paper to those looking for an equity-type return on the subordinated piece," the banker adds. "Demand should be good, because if you look at the interest payments on the bonds, it offers a definite yield pick-up on equivalent rated debt."
