Issuer: Optimum Finance
Amount: $650 million
Issue type: Asset-backed floating-rate notes
Launched: January 28 1998
Bookrunner: SBC Warburg Dillon Read
How many firsts can you get into one deal? Last month’s $650 million deal, issued through special-purpose vehicle Optimum Finance, was the first capital-markets transaction for the Italian export credit agency Sace (Sezione Speciale
per l’Assicurazione del Credito all’Esportazione).
It was also the first repackaging of sovereign debt into a portfolio and the first time Paris Club debts have been securitized. What’s more, by overcollateralizing so that $805 million-worth of debt is included in the pool, bookrunner sbc Warburg Dillon Read and Sace have managed to secure an overall rating of aaa for debts from countries with bbb ratings or lower. The bonds were all sold on the morning of launch, mostly by the bookrunner; only two other banks were involved, Nomura and Creditanstalt, and they were only assigned small chunks.
It’s an idea which other banks and issuers have been quick to seize on: several export credit agencies, in and outside Europe, have expressed an interest in similar structures, and jp Morgan and Crédit Commercial de France are set to launch a deal for French export credit agency Coface in February.
The difference between the two is that Coface’s deal will be backed purely by Poland’s Paris Club debts, and the French government is acting as guarantor in case Poland defaults. “We’d expect the Coface deal to trade as if it were a sovereign Eurobond,” says an official at the us investment bank. “Investors will not be exposed to the risk of default at all.”
Sace’s deal, on the other hand, is a multi-tranche issue using Paris Club debt from 20 countries, and is structured to allow for the possibility of default. That, however, is not seen as a likely development. “Concessions on export-related Paris Club debts are very rare,” says Peter Shorthouse, a director in sbc Warburg Dillon Read’s asset-backed finance department. “Where concessions are more usual is on development loans to the poorest countries, and we’re not including any in the deal. These are performing loans which have already been rescheduled, and any concessions have already been factored in. Nevertheless, we had to assume a large number of the loans will default in order to achieve the ratings.”
If all goes according to plan and there are no defaults, investors will be fully paid out within seven years. The largest tranche, for $400 million, has an average life of 1.5 years, and the next largest ($135 million) 4.5 years. Both are aa rated. The final two tranches, for $55 million and $60 million, carry aa and a ratings respectively. The pricing ranges from 30 basis points over three-month Libor to 75bp over, with an average of between 35bp and 40bp.
The reason the legal maturity is more than double the expected life of the bonds is simple: in the event of a default, the Paris Club works on the basis that the debts will be rescheduled over a further five years, so the legal maturity needs to provide more than enough breathing space. Even if there are defaults, the deal has been structured in such a way that it would take a large percentage of defaults to seriously affect the final payment schedule. For example, if 15% of the portfolio was to default, the last payment would come after eight years.
Deciding which credits to include was a lengthy process and involved staff from sbc Warburg Dillon Read and rating agency Standard & Poor’s envisaging worst-case scenarios. “We spent a lot of time making sure the cashflow model covered every eventuality,” says Shorthouse. “We developed a Monte Carlo approach to generate a very large number of stress-case scenarios, running them overnight on computer. Different combinations of countries and timings of default could produce very different results and we had to ensure that the bonds paid out in full every time. The computer runs came up with worse cases than either us or Standard & Poor’s had thought of in the earlier stages of the project.”
What they have not done is disclose which credits were used. “Only ourselves, Sace and Standard & Poor’s know who they are,” says Shorthouse. “That way the deal doesn’t have any effect on the other traded debt securities of the countries involved, in terms of either price or capacity. This was a very important element in the philosophy of the transaction.”
The deal does, of course, have a purpose beyond its appeal as an innovative structure: to free up some space to enable Sace to continue guaranteeing Italian companies’ exports. In that sense the deal is similar in theory to collateralized loan obligations (clos), such as NatWest’s Rose transactions and sbc’s Glacier deal, in which bank loans are repackaged as securities to free up the balance sheet for more loans.
“There are some crucial differences between the two asset classes,” says Shorthouse. “Loans move in and out of clos, whereas Optimum’s won’t change after launch. But the clos did prove to be our main point of reference when it came to pricing the deal. There was the obvious premium for it being the first deal of its kind, and the limited exposure, but we expect it to trade in well.”
Sace chief executive Mario Mauro is already looking to the future: “I can imagine doing more deals of this kind, possibly in other currencies, or a basket of currencies. But we want to track this deal over the next few weeks first.” He is also toying with increasing Sace’s role in the international capital markets by providing guarantees on bond issues for specific project finance deals.
As the deal offers exposure to emerging-market debt, even with a aaa rating, there were some investors who pulled out; the timing of the deal so close to the Asian meltdown put them off. The major buyers were hedge funds and bank funds in Germany, France, Italy and the uk, which each bought around 20% of the paper. And, says Shorthouse, the debts bear no relation to the crisis: “Mostly they’re from the early 1990s, for example, when the Latin American countries suffered from a liquidity squeeze. And only 10% of the portfolio is Asian debt.”
That could soon change, of course. If this structure catches on, the Paris Club debts which make up portfolios three years from now could be almost exclusively Asian.
