Barclays Bank's Risk Management team in London is laying off $1 billion in ABS exposure via a balance- sheet synthetic investment-grade structured finance CDO rated only by Fitch Ratings that is due to close by mid-April.

The 10-year transaction, dubbed White Oak Ltd., marks the Risk Finance Group's eleventh synthetic CDO. Investors will rely on the creditworthiness of Barclays (AA+/F-1+) since no collateral will be posted unless the bank is downgraded to F-1. In such a case Barclays will post assets equal to the amount of the funded notes, explained an official at Fitch. Fitch used Barclays' F-1+ rating, the short-term equivalent to triple-A, as a rationale to get the deal up to AAA.

How it works: Proceeds from the notes are invested in the swap provided by Barclays Bank Plc. The swap in turn references a $1 billion portfolio of ABS securities rated at least Aa3/AA-/AA- (M/S/F) that Barclays buys protection for.

Under the swap agreement, Barclays pays a premium in amounts equal to the notes' quarterly interest (plus expenses) and pays a final exchange amount initially set equal to the notes' principal upon maturity, which is subject to reduction for credit events. In exchange the issuer provides first-loss credit risk protection to Barclays on the reference portfolio. If a credit event does occur in respect to a reference obligation in the pool, the loss will reduce the principal amount of the notes inversely by order of seniority. Further, the notional size of the reference portfolio will step down by the notional amount of the affected credit in the pool. Credit events include: ABS bankruptcy, ABS failure to pay, ABS loss event, ABS non-payment default, ABS early-am, ABS restructuring, and specified rating agency default.

The underlying pool is static except for some limited substitution. Barclays has several restrictions on replacing assets in the pool; e.g. only double-A-rated ABS or higher.

Since 1999 the Barclays Risk Finance group has issued $3.5 billion actively managed synthetic CDOs, such as RF ALTS Finance, Nerva, Corvus, SFA, Taunton, and Savannah II.

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