Journey to Alpha, Centauri and beyond

Issuers: Credit-arbitrage vehicles
Amount: more than $ 8 billion in 1997

For a niche of the market that contains only three genuine participants, credit-arbitrage vehicles provide plenty of intrigue and acrimony. They also provide a hefty volume of deals: last year over $8 billion worth of Euro-MTNs. In September, the life of the first such vehicle, Alpha Finance Corporation, will come to an end. In the decade since its launch many have tried and failed to duplicate its success. And those that have succeeded have not always seen eye-to-eye.

The logic behind the vehicles is straightforward. Raise initial equity capital and leverage it by issuing triple-A rated debt, mainly MTNS and CP. Invest the proceeds in a portfolio of investment-grade assets, and give the equity investors a Libor-plus return from the credit spread between the company's assets and liabilities.

The difficulty arises in getting, and maintaining, the triple-A rating. Fiona Gregan,...