Lloyds TSB sold its first securitization of corporate loans last week, a first step in its strategy to use complex derivatives to shift risk off its balance sheet, the bank said.

The GBP1 billion ($1.9 billion) CDO is a synthetic, fully unfunded credit default swap (CDS) transaction, structured with six rated tranches. Moody's Investors Service rated roughly 87% of the vehicle - dubbed Ascot Black CLO - Aaa'. The remainder comprises four subordinated tranches, the most subordinated of which is rated Ba2' by Moody's. Each CDS benefits from the subordination of the respective lower tranches and a synthetic excess spread feature that provides additional credit enhancement to the rated credit default swaps. The bank retains a small first loss position, which features a synthetic spread construction.

The CDO was privately placed with institutional investors and details of the spread offering were unavailable. The bank said it is looking into similar transactions for the future.

"A synthetic construction allows the bank to better manage risk adjusted returns without losing valuable client relationships and now in conjunction with our portfolio management team we can start to look at other assets for similar value," said Reinald de Monchy, director of CDO origination and structuring at Lloyds.

The deal priced almost simultaneously with Lloyds inaugural RMBS deal, Arkle Master Issuer plc. The total transaction was increased from an initial GBP5.6 billion to GBP7 billion, making this the largest U.K. RMBS transaction the European market has seen to date. Arkle is structured as a de-linked master trust revolving program. Joint arrangers are Citigroup and Lloyds while joint book runners are these two and Lehman Brothers.

Deal pricing

Price guidance on Arkle was tightened across some of the tranches, analysts at Dresdner Kleinwort Wasserstein reported. At the senior level, the $1.6 billion Class 1A tranche was priced at a spread of negative two basis points while the 1.5 billion ($1.9 billion) 1.7-year Class 2A notes priced at seven basis points. Meanwhile, the $2 billion 2.8-year Class 3A tranche at priced at five basis points.

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