Sensing investor demand for a leveraged product linked to investment-grade collateral, Bank of America's Structured Credit Products Group has developed a new collateralized debt obligation structure called RIGHTs (Referenced Investment Grade Hybrid Transaction).
RIGHTs is an alternative to traditional CDO transactions linked to high yield collateral. Focused on the BBB-sector, the product also differs from other CDOs in that "it is structured to align the investor's interests with BoA's," explains Rick Briggs, the group's global head of trading. What that means is that "in RIGHTs transactions, BoA shares the risks and returns of the structure with the investor."
"In addition to U.S. investors, we are also seeing demand the RIGHTs structure from European and Asian clients interested in high yielding securitized product," says the group's global head Rick Ziwot. "International investors seem to be particularly interested in the RIGHTs structure's ability to include U.S., European and Asian obligors on a cash and synthetic basis."
The new RIGHTs vehicle follows on the heels of SERVES (Structured Enhanced Return Vehicle Securities), which was launched about 18 months ago. In constrast to the RIGHTs structure, SERVES provides leveraged returns to fixed income investors based on a high yield bank loan portfolio.
Since its inception, SCP has completed $9.4 billion worth of cash and synthetic CDOs in the last two years. On average, each cash deal varies from $250 million to $1 billion, depending on investor interest and the asset manager in charge. Synthetic deals range from $300 million to $600 million.
Originally set up as a credit derivative business in late 1997, the Structured Credit Products Group has expanded to include securizations, which now account for half of global revenues. At present, the team comprises 70 structures, traders and product marketers based in Charlotte, New York, London, Tokyo and Hong Kong.
Ziwot said the group is working on bring out more products, but as a matter of policy, he could not talk about them until they are ready for marketing. From start to finish, the development cycle of each product could take any where from weeks to months.
What he could say is, "new products are not developed in isolation in some laboratory. New products come out of discussions with investors and issuers." Clients for securitized products include banks and conduits that buy senior tranches of structured transactions; money managers and insurance companies that buy the mezzanine tranches; and hedge funds, foundations and high net worth individuals interested in equity and non-investment-grade loans.
The point is, "these new products are developed by balancing customer needs with market conditions," Ziwot said.
