It isn't everyday that you hear about deals in South Africa, though sources say that compared to other emerging markets, the country is an "exploding" structured finance arena.

After seeing its first MBS transaction in late November, the first-ever synthetic collateralized debt obligation is now expected to grace the South African market as early as this week, launching what some are calling a new appealing trend in the local market.

South Africa-based FirstRand Bank Limited (FRB) will originate and manage the country's first-ever synthetic deal, called Fresco 1. The portfolio primarily consists of corporate credits originated and managed nationally. The deal, which totals Rand 12.5 billion (U.S. $12.3 million), will provide protection to FRB on the corporate names up to the value of the portfolio amount by using credit default swaps.

At the close of the deal, Fresco, the issuer and bankruptcy remote entity, known as a special purpose institution (similar to the special purpose entity in the U.S.), will enter into a credit default swap with FRB, taking on senior, junior and mezzanine economic risk on the reference portfolio. Proceeds from the transaction will be used to purchase triple-A rated government bonds.

Aside from the fact that it's the first synthetic transaction that the country has seen, it was also provided a local rating, which makes the deal a bit unique. According to sources, it is a relatively new phenomenon to rate deals on a South African national scale.

Fitch Ratings, which has had an office in Johannesburg for quite some time, has provided preliminary national scale ratings of AAA' to the A class notes, AA' to the B class notes, A' to the C class notes, BBB+' to the D class notes and BB' to the E class notes. Fitch also has a double-A national scale rating on FRB.

According to sources, FRB chose to do a synthetic CDO since it did not necessarily require the funding that a normal cashflow CLO would provide to the originator and the servicer. "The fact that they have gone down the synthetic route suggests that they are looking for capital relief rather than to gain funding, which they are not receiving in this case," said Alec MacKay, an analyst at Fitch.

While the legal framework did not pose any problems - the specific structure was already in place - sources said the deal took more time to complete because it was the first of its type in the jurisdiction and also because there were some issues that had not been previously encountered in the local market.

The South African structured finance market seems to be steamrolling ahead and the local market volume has picked up significantly this year. According to MacKay, there are several deals brewing in the pipeline. "The market [in South Africa] is almost exploding, from the point of view [of comparing it to] some of the other markets that we work on in the emerging markets sector. It's very busy in terms of the local participants in South Africa that are actively pursuing a number of opportunities in their market."

However, the increase in deals is not necessarily in the number of transactions, but in terms of deal size. "The reason why we are seeing a watershed now is because we are seeing an increase in the size of the transactions that we are rating," said MacKay. "It's an increasing realization by the local participants that this is a form of funding that is available for them or in this case, an opportunity for capital relief by the major banks."

In addition to the recent up-tick in the size of transactions, there are an increasing number of headline deals, such as Fresco 1. In November, the country also saw its first MBS transaction, Thekwini Fund 1, a domestic Rand 1.25 billion (U.S. $125 million) deal joint managed by JPMorgan and Standard Bank of South Africa (see ASR 12/3/01).

And, according to MacKay, along with some headline deals in the pipeline, including a commercial paper transaction that Fitch is currently working on. "There have not been CP deals of the type that we are seeing now, where they are being sponsored by the major banks," said MacKay.

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