Morgan Stanley Dean Witter's Hong Kong office recently launched a 144A arbitrage CBO backed by a portfolio of U.S. dollar denominated bonds, primarily fixed rate convertible and straight corporate debt, with a global reach, but focused on Asia. The asset management arm of Singapore's United Overseas Bank acts as collateral manager and the deal comes through a Cayman Islands SPV called United Asian CBO Corp.

The portfolio totals $55.3 million and the deal was chopped into two rated pieces, a mezzanine tranche and an equity piece, both of which were unrated.

The senior tranches were made up of $23.4 million Class A1 notes, rated Aaa by Moody's Investors Service, and $9.9 million Class A2 notes, rated Aa2. Both tranches have January 2008 maturities.

According to Morgan Stanley's Eric Lim, the senior notes were sold at par to institutional investors in the U.S., Europe and Asia, while the mezzanine and equity pieces were also sold to institutions but also to some private individuals.

Because the convertible bonds that make up the majority of the pool pay only low interest rates, but mature at a premium, the deal is structured with low stated interest rates, but with a structure that sees principal collections passed through to investors via supplemental interest payments.

The A1 tranche pays a stated interest rate of 3%, with a supplemental rate of 5.25%, while the A2 piece pays 2% topped up with an extra 6.63%.

UOB was selected as collateral manager because of its experience of Asian credits, but it is relatively inexperienced in this kind of transaction, handling only one such deal in the past, a $221 million emerging market sovereign CBO called united Global Funding Ltd. Either way, the deal only allows limited trading of the portfolio, with a limit on discretionary trading. "We looked at this largely on a static pool basis," said Michael Ye, head of Moody's structured finance team in Hong Kong.

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