What's junk to foreigners might be gold to natives. For three years Colombian bankers have plucked high-yield, cross-border bonds from the dollar market and used them to back high-rated local deals, denominated in both pesos and greenbacks. Most of these transactions seek to capitalize on arbitrage opportunities between foreign and local rates and currencies. Another plus for structurers is the smoldering demand from pension funds barred from directly buying overseas paper.

But the catalyst can be something else altogether. The most recent of these CDOs was engineered for Credit Suisse First Boston to balance out risk between the Colombian peso and the dollar, according to sources. "They were looking for a counterparty for a swap operation," said a source on the transaction. And unlike other deals in the sector, the underlying notes are investment-grade.

Led by domestic brokerage Correval, so far Ps237 billion (US$83 million) has been issued off a Ps300 (US$104 million) program backed by CSFB notes that circulate in the U.S. market. Gomez Pinzon was legal counsel domestically, while Dewey Ballantine advised on foreign aspects of the transaction.

So far, Correval has priced a Ps169 billion (US$59 million) bond due 2011 at 6.3% plus CPI and a Ps68 billion (US$24 million) bond maturing in 2008, at 5.3% over CPI. Each bond is backed by CSFB notes with an identical maturity. The coupons of the underlying paper are 6 1/8% for the 2011 and 6 1/2 for the 2008. Other notes, maturing in 2005 and bearing a 6 7/8% coupon, are also eligible for securitization under this program. The inverted coupon curve for the CSFB notes is essentially a function of their time of issuance; they all have 10-year terms. At market value, the yield curve is not inverted.

Fitch Ratings affiliate Duff & Phelps rated the transaction AAA' on the national scale. Fitch rates the issuer of the underlying notes and swap provider for the transaction - both units of CSFB - at AA-' on the foreign currency, global scale.

The deal is further strengthened by an exchange rate contract between the trustee, Fiduciaria del Valle, and the Corporacion Financiera del Valle (Corfivalle). Under the terms of the deal, for each issue off the program the trust purchases the equivalent in dollars from Corfivalle and uses that to buy the CSFB notes abroad.

Since regulators prohibit institutional investors in Colombia from purchasing overseas paper directly, there is a built-in appetite for these kinds of CDOs. But that is no guarantee of success. "You've got to get the guarantees right or it may not work," said one dealmaker.

Up ahead in this asset class is Fititransgas, a securitization of a 144A issued by Transgas de Occidente in November 1995 for US$240 million. Sized at up to US$70 million and denominated in dollars, that deal might come out shortly, pending regulatory approval. It mirrors the terms of the collateralized paper, which matures in November 2010.

Duff & Phelps has rated the transaction AAA' on the national scale, while Fitch rates the underlying Transgas notes BB' on the global scale. The discrepancy is due to the fact that the sovereign is at the top of the national scale, in any country. Since Colombia's foreign currency rating is BB', as assessed by Fitch, a Colombian issuer with the same or higher rating would, by default, be triple-A on the national scale. The securitization strongly reflects the risk profile of Transgas.

The structurer for the deal is Finanzas Estrategicas, and the trustee, Fiduciara Union. This is not the first time Transgas notes have caught the attention of Colombian bankers. Correval securitized the same paper three years ago.

Transgas runs a gas pipeline between the cities of Mariquita and Cali. It extends for 344 kilometers. State-controlled Ecopetrol covers losses from damage to the pipeline by guerrillas, who pose a constant menace to infrastructure in the country.

Another transaction in the wings securitizes a 144A issued by the capital city of Bogota and due in 2006. Fitch has the issuer at BB' on the foreign currency global scale, on par with the sovereign. The domestic transaction is rated AAA' by Duff & Phelps. Sized at US$50 million, the deal is being handled by Finanzas Estrategicas.

That investment bank structured the last deal of this nature to hit Colombia's domestic market, Fiticodad. Backed by 2011 paper issued by Compania de Desarrollo Aeropuerto Eldorado (Codad) in the U.S. market, two tranches were priced in early May for a total US$25 million. The yield of 8% contrasted with the 10.19% coupon of the underlying asset. "The spread covered the costs and fees from the transaction," said a banker on the deal. For that bond, Finanzas teamed up with Inversionistas de Colombia, which acted as placement agent.


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