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How Core became Cast

Few banks better illustrate how the market has shifted from cashflow to synthetic CLOs than Deutsche Bank. The bank has been one of the biggest issuers of conventional CLOs, securitizing several billion euros-worth of corporate loans through its Core series of transactions in 1998 and 1999.

But at the end of 1999 Deutsche changed tack. The latest deal in the series was secured on a similar portfolio of corporate loans to the earlier Core deals, but this time Deutsche used a synthetic structure. The deal was branded Cast. "The primary reason we utilized the synthetic structure for Cast was to achieve transfer of the credit risk without the requirement to raise funding against the loans," explains Tamara Adler, head of securitization at Deutsche Bank in London.

The truth about securitization in Europe is that most banks - and Deutsche is surely no exception - can raise funds more cheaply if they borrow directly rather than by issuing asset-backed bonds. Freeing up capital by transferring risk synthetically can make a lot more sense.

Cast is also notable for a structural innovation: it reintroduces the credit-linked note into CLOs. Back in the early days of bank balance sheet CLOs, SBC used credit-linked notes in its Glacier structure. But the idea never took off. The problem with using CLNs was that the notes could be rated no higher than the issuer itself. That made it difficult for deals such as Glacier to be cost-effective.

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