Even amid strong supply, a relatively small deal - a synthetic CLO of U.K. project finance loans offering GBP31.75 million ($57 million) in funded notes - seemed to be the one prompting the most buzz in the European market last week, with analysts reporting it might herald a promising new asset class.
Merrill Lynch is managing the deal, which will be issued by an Irish special purpose vehicle called Essential Public Infrastructure Capital, or EPIC. The credit-linked notes are backed by 25 loans, totaling GBP394 million ($713 million), that Depfa Bank made under the U.K.'s Private Finance Initiative.
This is the first public deal to pool U.K. PFI loans, according to analysts at Standard & Poor's and other sources. The U.K. government uses the PFI program to contract with private companies to design, build and operate infrastructure projects.
But the potential for more is significant. Roughly 650 PFI projects have been funded since 1992, representing about GBP60 billion ($108 billion) of debt exposure on the books of European banks, said Michael Wilkins, an S&P managing director of infrastructure and leveraged finance.
"Other banks will be looking at this transaction very keenly to try and copy it," Wilkins said. "We expect quite the number of similar transactions to come forward." He cited Barclays Capital, HSBC and Royal Bank of Scotland among the banks with PFI exposure that are likely to take notice.
The loans in the initial portfolio for EPIC, which have a weighted average triple-B rating, consist of 17 that are property related, four for roads and four for rail projects. The properties include government-owned office buildings, hospitals, schools and prisons.
The deal is sponsored by the German bank KfW and features a structure that is similar to previous KfW-sponsored transactions, the S&P analysts added. The transaction includes GBP358 million ($648 million) in synthetic exposure through a credit default swap arranged with KfW.
The notes are distributed among six classes, including a GBP250,000 super senior piece rated triple-A by S&P.
The other classes, A through E, consist of GBP17.72 million rated triple-A; GBP3.94 million rated double-A; GBP2.95 million rated single-A; GBP2.95 million rated triple-B; and GBP3.94 million rated double-B.
All the notes are expected to be benchmarked to three-month Libor, but no price talk was available at press time. There was also no word on how soon the deal might price.
Wilkins said several attempts to securitize pooled PFI loans fell flat in the past, usually because of legal hurdles. He said this deal is causing some excitement, being the first of its kind to get off the ground.
"What makes this deal special is that it allows banks which over the past 12 years or so have built up a huge exposure to PFI in the U.K. to basically offload that exposure through the secondary market," Wilkins said. "This allows banks to release capital for other investments, essentially improving liquidity of the market. From that point of view, it's very important."
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