Only the second deal of its kind to hit the ABS market, Credit Suisse First Boston recently closed a $498.6 million, fifteen-year project finance collateralized loan obligation.
"We are the only ones in the market that have successfully closed these kinds of deals," said Guy Cirincione, director of project finance at CSFB. The first CSFB-sponsored project finance deal came to market in March 1998.
A project finance loan is a non-recourse, off-balance sheet financing to a special purpose entity that would use the money to invest in a project. The kinds of projects can range from a power plant to a gas pipeline or refinery.
Having been successful in structuring such deals, CSFB is planning to help other companies launch similar transactions.
In the recent deal, CSFB contributed 74% of the assets, while BHF-Bank contributed 26% of the pool.
"In one sense the deal was unique in that there were two different sponsors of the transaction," said Cirincione
Power project finance loans comprised roughly 50% of the pool, which included project finance loans such as telecom, chemicals, metals and transportation.
The transaction also included a foreign currency component, which amounted to 20% of the collateral, thus necessitating a foreign currency swap arranged by West LB.
"The notes that were issued were all floating-rate, US dollar denominated but somewhere down the line the collateral was not," said David Wolf, vice president at West LB. He explained that the underlying collateral included some fixed-rate US dollar loans as well as foreign currency loans.
"We switched fixed-rate dollar and the foreign currency back into floating-rate dollar," stated Wolf. "We did this so there will be no mismatch between the collateral and the liabilities. There should be no mismatch because rating agencies cannot model any kind of interest rate or currency mismatch."
Cirincione added that another somewhat unique feature of the transaction, which was divided into five tranches, four of which were rated by Standard and Poors Ratings Services, was the fact the double- and triple-B mezzanine notes were credit-enhanced by a triple-A insurance party before being sold to investors.
Though there's interest in the sector, there will not likely be a major increase in issuance anytime soon, Cirincione said.
"It's time consuming, each loan is very unique," he explained. "They are unrated loans to start with so it's a little more difficult than dealing with a typical corporate credit. The due diligence with the rating agencies is probably more complicated than a corporate CLO.
"Generally speaking banks have looked at corporate CLOs first because that's a larger percentage of their balance sheets," he added. "But I believe project finance CLOs make a lot of sense for active project finance lenders."
Cirincione predicts that gradually more transactions like this will be coming to market going forward. "As banks continue to look at ways of reducing capital these long-term loans are ideal candidates for securitization," he added.