A key feature driving the European ABS market from both a buy-side and sell-side perspective is diversity. And in looking to entice new clients, as well as keeping the business of existing accounts, bankers are looking for alternatives.
Bank of America Securities (BAS) did just that with today's EURO800 million synthetic securitization of credit-linked asset-backed securities. Only EURO44 million of the static (or unmanaged) CDO, called Helix Capital, was funded, the rest was constructed as a EURO742 million senior credit default swap and a EURO14 million equity piece.
The transaction represents the transferring of credit risk of part of the portfolio. Losses can be transferred on the EURO44 million piece and also on the EURO14 million of subordination. As a result the loss transfer will be limited to EURO14 million-EURO58 million of the portfolio. In the process of risk transfer, investors are granted access to a diversified pool of assets.
The credit default swap enables the transfer of risk to the Helix portfolio. Levels of sophistication put to use by originators vary, and to keep matters simple BAS opted for a 5-year bullet to simplify this complex product.
Helix Capital is referenced to a pool of 80 underlying entities, the collateral of which is medium-term notes originated under the Helix's EURO5 billion Asset-Backed Medium Term Note programme. The reference pool has an average rating of A3/A- by Moody's Investors Service and Standard and Poor's respectively. The EURO44 million funded tranche was priced to sell at Euribor plus 275 basis points. The rationale behind the issue was to sell a product offering capital diversity and quality, as well as yield pick up to draw in investors. The EURO14 million equity piece was retained.
Financial institutions and money managers were the main buyers. Take-up was evenly split between Northern and Southern Europe. The investor group also included some first-time buyers in the ABS market.