The European CDO market has been historically dominated by corporate-loan securitizations but the mounting pressures to improve shareholder returns is motivating banks to queue balance-sheet dilemmas in alternative directions, which may result in more project-loan securitizations coming to fruition by year's end, said market analysts.

Last week's pricing of Citibank's $350 million Project Securitization Co.1 is expected to be a first in a series of project finance-loan securitizations for the bank, which intends to free up regulatory capitol in its sizeable portfolio in order to originate additional loans.

With three deals to date starting with the 1998 and 1999 Credit Suisse First Boston project-loan securitization, accessing the market has required amending the corporate-loan CDO approach and it has consequently slowed the deal process. Unlike corporate loans, project loans have different credit profiles, different loan structures and different behavioral characteristics that require a new varied approach to addressing the collateral pool, explains an S&P analyst.

"The challenge here is that project-loan securitizations are not really your typical CDO it would flunk the diversification pool and that's what you are looking for within that structure," he said.

S&P has amended its corporate-loan default model and applied a multijurisdictional approach that "factored the risk that a sovereign-default multiple projects to default." More than 70% of the project-loan pool belongs to countries rated below an AA- and loans concentrated in the same region were lowered by three notches.

The deal faced additional pressure when its multiline credit wrap provider Assurances Generale de France (AGF) stumbled down the ratings ladder. It managed, however, to maintain both its AAA rating, which ironically is rated higher than the AA+ of its financial guarantor.

Both tranches priced within original price talk despite a five basis point widening that threatened the deal earlier this month. The class-A, AAA-rated tranche priced at +50 basis points and the class-B, AA-rated tranche priced at +75 basis points. According to S&P, the triple-A rating is based on the creditworthiness of the underlying assets and does not give effect to the AGF wrap. "A downgrade of AGF would not automatically cause a downgrade of the notes," reports S&P.

As part of the ratings process, each and every loan within the collateral pool must receive an individual rating a process that can take over six months, since most project loans go unrated, whereas typical CDO investors are used to seeing a turnaround of six to eight days for corporate-loan ratings, said an S&P analyst.

"From a syndicate standpoint we wanted to take a fair amount of time to let investors get familiar with the structure," said a spokesman with underwriting bank, Schroder Salomon Smith Barney. "[Project Securitization Co. 1] was more of grey box' format, because of confidentiality reasons we could only offer investors generalizations." It's a sore point that the spokesman said must be remedied, especially for investors who prefer to see more details on the loans.

Citibank plans to continue to issue along the same template as its Project Loan Securitization Co.1 and market analysts say that the frequency of deals emerging from this asset class will certainly speed the process on future project-loan securitizations.

"So far so good, everything seems to have gone well," said the S&P analyst. "Irrespective of that there are other banks that are working on project CLOs German banks and Spanish banks in particular. Citibank's deal was the catalyst; it showed that it could be done and that there is enough investor interest in the product."

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