Goldman Sachs and Straits Lion, the Singapore-based asset manager, last week closed a novel Asia CDO called Straits Lion Asia, referencing primarily Asia-based credits. Goldman Sachs acted as sole bookrunner and structuring agent on the seven-year issue, which packages together a US$1.5 billion portfolio of credit default swaps.

The transaction is fairly unique for an arbitrage CDO from Asia in that 65 of the 100-strong reference pool are Asian credits. In most previous CDOs, the bulk of the credits were Europe and U.S. based, due to the relative scarcity of high quality Asian corporate issuers.

"It was not an easy task to structure given that spreads in Asia are tight and that maturity demands from investors were at a mismatch," explained Lye Thiam Woo, head of structured assets at Straits Lion. "However, with our efforts, together with Goldman Sachs' structuring capabilities, we were able to overcome these difficulties. The deal has a seven-year maturity with a five-year call option, so we were able to bridge the mismatch. We also ensured investors need for a diversified pool was met by including credits from a range of sectors, industries and regions."

Also unique, Straits Lion can actively trade credits for the duration of the transaction.

As this issue went to press, full-pricing details had not been disclosed, which, unfortunately, is not uncommon on Asian CDOs. However, Lye told ASR that the triple-B rated mezzanine tranche offers spreads of around 210 basis points over Libor, a pick-up he described as "very attractive versus other bonds with the same ratings."

That may be so, but it still demonstrates a significant contraction of spreads over the Asian CDOs issued last year, when pricing details were publicly disclosed. A deal completed in May 2003 by JPMorgan Securities for Singapore's DBS Bank and DBS Asset Management - backed by a $1 billion portfolio of predominantly U.S. and European CDS - offered spreads of 65 basis points on the triple-A piece down to 350 basis points for the triple-B tranche.

Meanwhile, in March 2003, Straits Lion was involved as collateral manager on a US$1 billion hybrid CDO that was structured by HypoVereinsbank (HVB). The deal packaged together $120 million of mainly Asian asset-backed bonds and $880 million of CDS. This deal priced identically to DBS' deal for the triple-A paper but 50 basis points wider on the triple-B notes.

It remains to be seen whether the Goldman/Straits offering will lead to a glut of Asian CDOs, as happened in the second and third quarters of 2003.

RCC reaches magic

1 trillion milestone

Japan's Resolution and Collection Corp. (RCC), the government agency established in 2000 to resolve the country's crippling non-performing loan problems, will soon launch the latest deal from its RRC Trust vehicle. Lehman Brothers is acting as arranger on the transaction, backed by a portfolio of NPLs with a face value of around 170 billion (US$1.5 billion), with Mitsubishi Trust and Banking Corp. the trust bank.

The trust will issue beneficiary rights worth 14.8 billion, with investor interest expected to come mainly from regional banks. The issue has been split into four tranches, all with a legal maturity of five years, including 9.1 billion of triple-B paper.

The latest offering will take the principal value of RCC's securitization program, which was established in February 2002, past the 1 trillion mark. There is unlikely, however, to be any letup in issuance during the next couple of years.

With the country's economy seemingly back on track after a decade-long slump - real GDP has grown for seven straight quarters - the government is desperate to step up the NPL resolution effort, which RCC is at the heart of. NPLs in the banking sector have had a devastating effect in Japan, with banks unable to generate new loans needed for the economy to grow.

However, a revival in real estate prices coupled with genuine progress in NPL disposition has at last enabled banks to start building up their businesses again.

Under the so-called Takenaka Plan - the brainchild of Heizo Takenaka, senior vice minister for financial services - Japan's banks are required by the end of the fiscal year in 2005 to have halved their NPL ratios from 2002 levels. Although banks managed to get $141 billion of NPLs off balance sheet in 2003, the NPL ratio only fell from 8.4% to 7.2%, so there is still some way to go for the Takenaka target to be reached.

It is estimated that the amount of NPLs in the banking sector was $329.3 billion at the end of the 2003 fiscal year. RCC acquired additional NPLs in 2003 with a face value of $18.7 billion. With more such purchases sure to follow - from RCC and foreign investors - in 2004 and 2005, NPL securitization will play an important role in maintaining the economic recovery effort.

Over in Taiwan, Jih Sun Bank is rumored to have mandated HVB to handle its debut securitization offering. ASR understands, from sources in Taipei, that Jih Sun is seeking to raise around $150 million from the deal, which will be backed by a pool of auto loans, and is likely to target offshore investors.

There seem to be good grounds to believe the transaction will be denominated in U.S. dollars. HVB, with UBS, put together the country's first cross-border deal in December 2003, a $230 million credit card issue from Cosmos Bank. That deal, rated Aa3' by Moody's Investors Service and AA-' by Standard & Poor's, priced at 93 basis points over Libor.

Copyright 2004 Thomson Media Inc. All Rights Reserved.

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