Investors in the European marketplace will be able to reference an equity index through a newly unveiled index-linked synthetic CDO structure, which Standard & Poor's has branded a first in the industry.
While market sources may argue that point, the structure behind this CDO could be the first of many like it, given the rebound of particular areas of the global markets and the rate at which indices are seemingly created these days.
Linker Finance Plc 2004-1 is a GBP100 million inflation-linked transaction tied to a portfolio tracking the DJ iTraxx index, comprised of 155 European corporate and financial credits. At press time, the transaction - with an August 16, 2013 final maturity - was expected to have closed. It had received a preliminary rating of triple-A by S&P analysts last month. Deutsche Bank AG is the arranger, custodian, CDS counterparty and asset swap counterparty. The issuer is a SPE incorporated in Ireland in 2003 under the name Rosebud Securities Plc. In addition, this marks its first entry into the CDO marketplace.
The managed collateral pool, typically rated based on a worst-possible performance-pool scenario, is required to run a new analysis using S&P's proprietary CDO Evaluator credit-risk tool, prior to any substitution being made.
Interest is paid semiannually, despite the notes' floating-rate structure. Payments are based on the U.K. Retail Price Index, which has risen by roughly 200% since the issue of index-linked gilt to date. (In fact, the GBP100 in notes issued by Linker is the index-adjusted nominal amount; the face amount is GBP48 million.) Proceeds, based on the 202% issue price, will be GBP101.26 million. Funds will be invested in collateral consisting of U.K. index-linked treasury stock and other triple-A rated eligible securities.
A mismatch exists between the payment streams received from the collateral and CDS counterparty as well as the interest and principal payments owed to the note holders, S&P analysts said in their report. However, Deutsche Bank will make those payments, as flows are first paid to the issuer and then passed onto Deutsche Bank under the asset swap.
Under the terms of the CDS, should aggregate losses exceed 11%, the issuer will make a payment. The CDS agreement uses the 2003 International Swaps and Derivatives Association (ISDA) credit derivative definitions laid out in the 2003 supplement.
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