Gulf International Bank successfully joined the growing list of firsts in the European securitization market, pricing its EURO294 million CBO last week. F.A.B. CBO 2002-1 marks the first cashflow arbitrage CBO of European mezzanine and subordinated asset-backed bonds.

The transaction is a repackaging of investments in European mezzanine and subordinated ABS to be managed by the London-based Financial Markets Group of Gulf International and it is sure to fetch the interest of market participants, said Mark Moffat, co-head of European CDOs at the lead managing bank, Bear Stearns.

The deal was issued to the market in three tranches rated by both Moody's Investors Service and Standard and Poor's and priced its Class A1, Aaa/AAA tranche at 50 basis points over the Euribor; Class A2, Aa2/AA tranche at +80 basis points; and its Class B, Baa2/BBB tranche at 225 basis points. "Investors like these deals especially in the current market environment where the ratings action against corporates has been high," explained Moffat. "This transaction is backed by predominately non-corporate assets such as RMBS, CMBS, etc. Investors were quite keen on participating in the spread benefit you get in CDOs but backed by a portfolio with a relatively small corporate exposure."

These assets are part of what Moffat coined as the "bread and butter" business of GIB, who has been active in buying European mezzanine ABS since its inception in 1996. Because the company has built up the portfolio over this period of time, it has the ability to pick and choose. The portfolio is fully managed.

A maturing European market finally makes the required diversity and volume of assets required to complete such a transaction available, and it is only now that it's possible to complete deals that are entirely collateralized by European assets on a mezzanine level. This factor, combined with the attention that rating agencies have provided, made this an ideal moment to come to market, said Moffat. Rating agencies have put in place multijurisdictional criteria that clarify the shades of gray that have to be addressed in Europe, which make these transactions more difficult to arrange than in the states, he added.

"Going forward, likely issuers would be banks and asset managers who have built up a good track record in buying ABS across Europe and are looking to leverage their skill base in ABS," said Moffat. "This transaction has aroused interest from both our competitors and issuers but since the criteria is still not yet well established it requires a lot of work to complete. Nonetheless we have had a lot of interest."

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