Following the path set by Chinatrust Commercial Bank’s NT$18 billion (US$536.8 million) offering designed by UBS in September, two more CDO deals have been completed in recent weeks, with more to follow.
In order to enhance returns, UBS devised a structure packaging the NT$-denominated structured bonds, consisting mainly of inverse floaters, with triple-A rated US-dollar denominated zero coupon bonds. The idea was to combine the two into a fixed security, issued as a domestic CDO.
Although the precise structural details have been kept secret, Lehman Brothers followed a similar path with the NT$27 billion ABCP facility it established for Taishin International Bank.
An initial NT$4 billion deal was launched out of the Taishin CBO SPT2 vehicle. It packaged a NT$2 billion pool of structured bonds purchased by Taishin from bond funds with an identically sized US-dollar synthetic CDO, issued by Beryl Finance, Lehman’s Cayman Islands-registered SPV. Fitch Ratings assigned local ratings of F2 to the conduit.
The combined security pays a coupon of 20 basis points over the 90-day commercial paper index, equivalent to a 1.65% coupon. The paper will be rolled over at the end of each term. Credit support for investors comes chiefly through a 100% purchase commitment by the underwriter, Taishin Bills Finance, and a NT$94 million cash reserve.
Taishin is expected to issue the next deal from the facility before year-end.
Meanwhile, Industrial Bank of Taiwan, a frequent ABS issuer, last week completed its own NT$11.5 billion CBO. The deal combines 50% of NT-dollar denominated paper with two synthetic CDOs, referenced to 100 credit names, into a fixed-rate security. JPMorgan Securities structured the transaction.
The NT$9.7 billion senior tranche, rated triple-A by local agencies, pays 2.176% over a 3.7-year average life, which compares favorably to treasurys of a similar tenor, trading at 1.81%. Additionally, the NT$264.5 million double A-rated bonds offer 2.226%, while the NT$1.23 billion of single A-rated paper pay 2.276%.
Credit enhancement of around 4% for the senior notes comes through subordination. Some rival bankers raised eyebrows at the relatively small level of subordination, given that eight of the credits on the CDOs are sub-investment grade.
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