Several CLOs backed by public-private partnerships (PPP) and project finance loans (PFL) have recently hit the European market. More are anticipated this year as issuers look for regulatory capital relief and managers scour the market for higher-yielding assets that also offer the cushion of diversity from such widely referenced sectors as residential real estate and corporate debt.
A sequel to the Stichting Profile Securitization I deal, which came to market last December, is slated for this year, according to one of its arrangers, Sumitomo Mitsui Banking Corp. Europe. The most recent such deal (itself the second in a series), EPIC CLO II, came to the market in early July. The 900 million ($1.2 billion) arbitrage cash flow deal is backed by a portfolio of PPP and PFL loans, along with a bucket of synthetic collateral. Merrill Lynch arranged the deal to the market and DEPFA Bank is the manager; KfW Bankengruppe intermediated. The A-plus tranche of the deal priced at 38 basis points over three-month Euribor.
CLOs backed by PFL and PPP loans have been talked up for years as a potential growth area, but legal hurdles, among other issues, have restrained the sector so far. New issuance is expected largely because of the anticipated popularity of the so-called infrastructure CLOs as a funding outlet for PPP and PFL originators. Banks are being hit by regulatory capital charges for holding the loans on balance sheet, according to Fitch Ratings, particularly those loans that are below investment grade. The charges are prompting PPP and PFL originators to sell the loans or package them into securitization structures. For example, as a result of the EPIC CLO II deal, DEPFA was able to reduce its regulatory capital requirement by 70 million, improve its return on equity and reduce its risk exposure, according to the bank. Fitch said last week it is anticipating more portfolios with a pan-European or global nature; it also is expecting more cashflow deals in the sector.
The first securitization backed by UK PFI assets was DEPFA's EPIC PFI deal, which closed in November 2004. Stichting Profile Securitization I, which was brought by NIBC Bank N.V. in December 2005, is said by Sumitomo Mitsui Banking Corp. to be the first "public synthetic securitization of U.K. PFI and PPI loans." The super senior and A-plus tranches of the GBP383 Million ($725 million) deal were privately placed, while the A tranche priced at 38 basis points over three-month Libor. The first deal credited as being a project finance hybrid CDO was Project Funding Corp.1, a $617 million CLO launched by Credit Suisse in 1998 (ASR, 05/10/04).
The deals come at a time when both U.S. and European CDO managers are seeking higher yielding asset classes that actually perform well - amid a sea of relentlessly tight spreads. As the U.S. rate tightening cycle has come to an end for now, excess liquidity still sloshing about the global marketplace is likely to lead to a continued environment of flat yield spreads, JPMorgan Securities pointed out last week. "There is likely to be a persistent bid for risky asset classes, including equities, longer-duration fixed income, credit and commodities," JPMorgan analysts wrote.
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