RiskNews

Barclays takes over Duke's energy portfolio

Barclays Capital has taken on the energy portfolio of Duke Energy North America through a $700 million novation deal.

Under the terms of the transaction, the UK bank will acquire and manage the portfolio of power and gas derivatives, and will receive $700 million from Duke. The majority of this payment will be offset by the return of net collateral requirements to Duke, Barclays says.

Duke announced in September that it planned to divest its energy business outside the American Midwest as part of a restructuring. While Barclays will take on most of Duke's portfolio, Duke will keep derivatives associated with its power generation assets, as well as various contracts associated with gas transportation.

Payment is due by January 3 next year. The $700 million represents the difference between the portfolio and current market prices, as well as transaction costs. The underlying contracts will transfer to Barclays over the next few months, says Duke. The rest of the assets will be divested by September next year.

"With Barclays acquiring the lion's share of Duke's book and assuming the associated risks, we've achieved a significant strategic objective in just two months, well ahead of our initial schedule," says Paul Anderson, Duke Energy's chairman and chief executive.

Banks turn to credit CPPI

A flurry of credit constant proportion portfolio insurance (CPPI) notes has emerged targeting retail and institutional investors, with ABN Amro, BNP Paribas and Calyon all launching deals over the past few months.

BNP Paribas has launched the second series of its Dynamo hybrid cash and credit derivatives notes, which will again be managed by Crédit Agricole Asset Management (CAAM). The notes are designed to offer investors dynamic leverage on a portfolio of cash bonds and credit default swaps (CDSs), which CAAM will manage using directional and relative value strategies. BNP Paribas raised €525 million for the first tranche of Dynamo, making it the largest credit CPPI-type note issued to date. Unlike the first tranche, the new series will also be available in US dollars, sterling, Swiss francs, yen and Australian dollars.

ABN Amro, meanwhile, has teamed up with France's Axa Investment Managers for its CPPI deal, called Synergie. The notes were issued in euros and dollars, with maturities of 10 and eight years, respectively. The euro notes pay a contingent coupon of 50 basis points over Euribor, while the dollar notes pay a contingent coupon of 100bp over Libor. As portfolio manager, Axa will be able to take long and short positions in CDSs and corporate cash bonds. The deal was sold to institutional investors in Europe, Asia and the Middle East.

"Synergie has been structured to give Axa Investment Managers the freedom to pursue outperformance through a diverse range of credit strategies," says Richard Whittle, London-based global head of exotic credit derivatives at ABN Amro.

Axa has also teamed up with French bank Calyon to offer a CPPI note called Ocean. The portfolio comprises credit default swaps – both single names and indexes – and cash bonds based on both investment-grade and high-yield names. The first tranche, which will be rated Aaa by Moody's Investors Service, will be launched in the first week of December. The notes will be made available in all major currencies, with various maturities and coupon profiles.

Thomson TradeWeb opens CDS market-place

US market operator Thomson TradeWeb has opened its TradeWeb CDS online credit default swap (CDS) market-place for business, with eight dealers already members.

TradeWeb uses the TradeXpress straight-through processing network, and conforms to the International Swaps and Derivatives Association's novation protocol. Users of the platform will be linked to the DTCC Deriv/Serv confirmation service, and will be able to confirm trades in real-time without exchanging paperwork. The backlog of unconfirmed CDS trades has been repeatedly named as a significant problem in the derivatives markets as a whole.

Since the market-place was originally set up, five more dealers have joined. ABN Amro, Barclays Capital, Dresdner Kleinwort Wasserstein, Merrill Lynch and UBS are now directly linked to the Deriv/Serv service through TradeWeb CDS, as well as the three founder members – Goldman Sachs, JP Morgan and Morgan Stanley.

Markit launches ABS service

UK data services provider Markit has launched a same-day pricing service for European asset-backed securities (ABSs).

The service will provide same-day bid and offer prices, spreads and average life assumptions on more than 3,500 securities. Classes covered include residential and commercial mortgage-backed securities, asset-backed securities and cash collateralised debt obligations.

Prices are based on daily mark-to-market pricing information from major ABS dealers and market-makers, according to Markit. The service will be available through a website, designed to allow dealers to reveal prices selectively to specific clients, and to give buy-side users access to specific security pricing data.

CDO market to reach $2 trillion in 2006

The notional size of the collateralised debt obligation (CDO) market should reach $2 trillion by the end of next year, according to research by Celent. The New York-based consultancy also predicts that dealers will have to specialise their activities due to the complex nature of the market.

Celent says increased investor demand as spreads tighten in other asset classes, along with a greater need by banks to lay off the risk of loans as Basel II regulations are phased in, will continue to drive the CDO market's growth. The market's average annual growth rate in the past seven years has been around 150%, according to Celent.

The consultancy claims that few banks are prepared to be active in all parts of the CDO market and predicts that regional commercial banks will concentrate on risk origination, while larger banks will focus on structuring and distribution.

Celent highlights overlap risk – the risk that a default by a popular name might prompt a broader market downturn – as a possible factor that could negatively affect future growth. For example, 80% of CDOs reference Ford, General Motors, and General Electric, with 40 of the most popular names appearing in 50% of deals.

US convert bond holdings plummet

The market value of institutional holdings of US convertible bonds has plunged by nearly 20% in the past year, according to research by Greenwich Associates.

Alongside other investors, hedge funds are diversifying strategies or abandoning the convertibles market altogether, Connecticut-based Greenwich claims. A confluence of factors has affected convertible bond values in the past 12 months, including low equity volatility and widening credit spreads. The aggregate value of US institutional holdings is now around $240 billion. Convertibles now represent only 45% of the average convertible investor's total capital under management.

Nevertheless, hedge funds continue to be the most active traders, with an average 12-month trading volume of almost $1.9 billion per fund in convertible bonds – roughly double the average annual trading volume of outright investors. Outright investors and hedge funds traded a combined $290 billion worth of US convertible bonds in the past 12 months.

In Europe, the long-market value of total convertible holdings among institutions rose by 10% during the past year to approximately €160 billion, driven in large part by growing interest in convertible products referencing Asia-Pacific underlyings. According to Greenwich Associates, the average European fund increased its allocation to this region to 23% in 2005 – more than 14% higher than one year earlier. Hedge funds now represent less than 60% of the total number of active convertible funds, compared with 70% two years ago.

HSH closes ship loan securitisation

HSH Nordbank has closed its second ship loan securitisation deal, named Ocean Star 2005. The German bank, based in Hamburg and Kiel, used a private placement of structured notes to transfer the credit risk of a ship loan portfolio worth about $570 million. Its total ship loan portfolio was valued at $22.7 billion on June 30, 2005.

European, US and Asian institutional investors purchased the credit-linked notes, which consist of an underlying portfolio of 72 loans mainly used for financing container ships, tankers and dry-bulk carriers, the bank says.

HSH Nordbank has now executed ship loan securitisations totalling around $1.6 billion, including the Ocean Star 2004 securitisation. But this latest deal was the first the bank had conducted since Germany abolished state guarantees to Landesbanken in July this year.

"The Ocean Star 2005 notes achieved tight pricing spreads, while those for last year came at a premium," says Martin Halblaub, executive vice-president at HSH Nordbank. "This year, we had a much broader reception. The spread on the first-loss piece was 2.2% compared with 2.8% last year; while spreads on the AAA and BB pieces were 30 basis points and 460bp, respectively, compared with 47bp and 650bp last year. Investors are beginning to see shipping managed by HSH Nordbank as more of a commoditised asset class."

ABN Amro completes first sector property derivatives trade

ABN Amro has completed a property derivatives deal based in part on the Investment Property Databank (IPD) UK Retail Index, in what it claims is the first to be based on a specific sector of the market.

Previous property derivatives transactions have been based on the IPD All-Property Index (API), but many potential entrants to the market have argued that sector-specific deals would be far more useful than the API for balancing property portfolios and exploiting knowledge of property market dynamics.

ABN Amro performed a 15-month swap comprising £30 million exposure to the API and £30 million exposure to the retail sector index. The property derivatives joint venture between CB Richard Ellis and GFI, formed in June this year, acted as broker on the deal. ABN Amro says it will warehouse some of the risk involved. The pricing for the transaction was not revealed.

ABN Amro's global head of credit trading, Charles Longden, expects a greater need for sector-specific trades with shorter maturities, saying demand should grow "significantly".

Man acquires Refco broking business

A federal judge has approved Man Group's purchase of the broking business of the bankrupt Refco financial services group for $282 million in cash, plus debts. Meanwhile, Phillip Bennett, Refco's former chief executive, has been indicted on eight counts of conspiracy and securities fraud.

Man won the auction with a bid worth a total of $323 million – $282 million cash and $41 million of assumed debts and other considerations. Bankruptcy judge Robert Drain resisted calls to speed up the auction after an initial bid from a team led by private equity firm JC Flowers was withdrawn last month.

The sale price is well below initial estimates. Initially, Refco planned to sell the brokerage, Refco LLC, and various other subsidiaries for a total of $768 million. But since the Chapter 11 announcement of the parent company (although not the brokerage), clients have been leaving the brokerage in large numbers, reducing its value. Man now plans to liquidate the brokerage under Chapter 7 of US bankruptcy law, bringing its customer accounts into its own brokerage business.

Meanwhile, a grand jury in New York has indicted Bennett for conspiring to conceal debts run up by its customers in the late 1990s, and therefore defrauding the investors in Refco's August initial public offering (IPO). Bennett himself made $100 million from selling shares in the IPO, according to the indictment. Although the indictment referred to other conspirators, none were named and no others have been indicted so far.

IIF warns against further Basel II delay

The Institute of International Finance (IIF) has warned that any further delays in implementing the Basel II capital Accord could cause serious problems.

The IIF released a report in mid-November on the outstanding issues related to Basel II implementation. Daniel Bouton, Société Générale's chief executive and the chairman of the IFF regulatory capital committee, says the most important issue is the problem of staggered implementation. The process has already been thrown off by the decision by US regulators, led by the Federal Reserve Board to delay Basel II by a year. Bouton says any more delays would be a mistake.

"It is urgent that we get fast to the certainty that schedules in the big jurisdictions do not create more problems in terms of competition and level playing fields than they solve," says Bouton. "I think we can cope with a few months' lag, but it would be very difficult and costly to cope with a significant number of years of mismatch between the US and the EU."

The IIF also raised the question of the scaling factor, planned to ensure that capital requirements from Basel II are similar to pre-Basel II requirements. A drop in capital requirements was one of the main advantages of the switch to Basel II, Bouton says, and the scaling factor could prove an unnecessary burden during an economic downturn.