Calyon is arranging its first CDO backed by commodity trigger swaps - or a collateralized commodities obligation (CCO) - set to close by the end of the month. The transaction, Amadeus 2007-1, references 10 commodities, including base metals, precious metals and energy assets, through a static portfolio of 150 Asian long and short commodity trigger swaps. But the new CCO is launching into what has been a relatively inactive sector, raising the question: Will these exotic' products be seen as an investment alternative for CDO investors in search of diversity?
According to a Derivative Fitch presale report, Cayman Islands-based special purpose vehicle CAREDA Finance Ltd. will issue $70 million in floating-rate notes (consisting of a $30 million three-year triple-A-rated note, a $20 million three-year double-A-rated note and a $20 million three-year single-A-rated note) to invest in the swaps - 75 long and 75 short - which are similar to credit default swaps. Credit enhancements of 16%, 12% and 8% have been provided for the three-year A, B and C notes, respectively.
The transaction is structured with long triggers on copper, lead, nickel, silver and zinc and with short triggers on oil, gas, aluminum, and gold. Of the 150 swaps, there are between 13 and 17 trigger swaps per commodity.
The deal's performance will depend on the price fluctuations of the commodities underlying the swaps. The principal of the notes will be reduced at the three-year maturity if the number of net triggers breached (long minus short) exceeds the attachment point of the tranche, said Alexandre Linden, senior director at Derivative Fitch. This risk would materialize if, in three years' time, the prices of commodities with long triggers fall below their trigger points and the prices of commodities with short triggers don't, upsetting the balance. However, if commodities prices rise over the life of the deal, then no triggers will be breached and investors will receive their full principal back, Linden said.
A New Commodity?
As investors search for diversity amid the troubles in ABS CDOs, the liquidity crunch in the corporate credit sector and the uncertainty of the U.S. economic forecast, there has been speculation whether transactions like CCOs can serve as an alternative for other structured vehicles. Fitch's Linden didn't not know whether investors would move into the sector at this point in time. "It remains to be seen if post-crisis credit investors will diversify into CCOs or not."
Other market participants are quick to note a lack of interest in the sector. "There has not been much issuance in the CCO market; the economics are just not there for the transactions," said a CDO market participant, who noted that investors are more interested right now in risk they are familiar with, credit and leveraged loans in particular. "People are looking to find their juice in the CLO market right now. Any other type of transaction, there has to be a premium to what they see in those markets, and that's with all exotics, CCOs included." Another market participant, who could not provide information on the actual spreads, said he had heard the transaction was priced tightly for the heightened investor scrutiny in the market. Calls to Calyon were not returned by press time.
Indeed, CLOs appear to be the structured finance vehicle du jour, though issuance is only beginning to trickle in. Last week, Deutsche Bank priced Genesis CLO 2007-2 Ltd., a sizable $1.6 billion static pool CLO managed by Levine Leichtman Capital Partners. The $1.236 million three-and-a-half-year class A tranche was rated triple-A and priced at Libor plus 50 basis points; the $65 million six-year B tranche was rated double-A and priced at Libor plus 125 basis points; the $70 million six-year class C tranche was rated single-A and priced at Libor plus 225 basis points; and the $55 million six-year class D tranche was rated triple-B and priced at Libor plus 400 points. The deal is set to close on Dec. 20, 2007.
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