RBS puts toe in CDO water

In a move that confirms the increasing readiness of both European issuers and investors to embrace synthetic products based on leveraged loans, The Royal Bank of Scotland (RBS) has completed a novel transaction linked to an underlying portfolio of up to £300m of senior and mezzanine leveraged loans.

RBS, which has been busy building a sizeable leveraged loan book backing MBOs, MBIs, private company acquisitions and corporate restructurings, has bundled up some of these to issue the CDO through special purpose vehicle Cairngorm Limited. The majority of loans used within the CDO come from RBS.

The CDO has two elements: a £213m unfunded senior credit default swap, and a £87m funded subordinated credit default. In order to assemble the right mix of assets, the transaction has a one year ramp up period and a five year revolving period. Its ultimate maturity is scheduled to be 14 years. The senior loans have been, or will be, advanced to UK entities, whilst the mezzanine loans will be advanced may be domiciled in the UK, France or Germany.

Willie Clark, Managing Director of RBS's Structured Finance Division said that this was the first in a series of such products to come from the bank. 'It's also a good time to be investing in leveraged assets – the multiples are lower and investors can access a better position in the capital structure' said Clark.

Although the number of European investors familiar with such structured products is far smaller than in the US, Clark confirmed that only UK and European investors had been targeted. 'There's a growing number of European institutions ready and able to buy this kind of product' he said. Clark added that the bank had spent some time talking to relevant investors in anticipation of the CDO's launch to make sure the right product was offered.

Cairngorm Limited raised funds to cover its potential obligations under the subordinated credit default swap by issuing £87m of notes listed on the Luxembourg Stock Exchange. These notes were rated by ratings agency Fitch and ran from a AAA portion [£28.1m] to an unrated portion [£30.6m]. The unfunded senior credit default swap received a credit assessment of AAA by ratings agency Standard & Poor's .

RBS's Structured Finance Division will act as collateral manager and RBS Financial Markets' securitisation team structured the transaction and placed the senior unfunded credit derivative and the notes with investors. Clifford Chance provided the legal advice on the transaction.