JP Morgan Chase closes first Korean synthetic credit transaction

JP Morgan Chase has closed South Korea’s first synthetic credit transaction this week. The US investment bank has arranged a hybrid 10-year $30 million credit-linked note (CLN) with exposure to Korea Development Bank credit risk and the super senior swap tranche of a synthetic collateralised debt obligation (CDO). The CLN was sold to a Korean institutional investor.

The CLN was priced at 170 basis points over the London Interbank Offered Rate. “The spread of the transaction was very good compared with other CDOs,” said one Korean investor, noting that the deal is very attractive compared with the risk.

Adding the AAA-rated super senior tranche as collateral on the CLN helped improve the overall credit risk of KDB’s A-minus-rated credit risk, according to Lionel Semonin, JP Morgan Chase’s Hong Kong-based head of structuring and solutions for credit and rate markets in Asia excluding Japan.

The coupon payment on the CLN is linked to the performance of the KDB credit default swap (CDS) and the super senior swap. The coupon is equal to the KDB CDS risk premium plus the super senior swap premium minus the correlation of the two swaps.

JP Morgan Chase worked on the transaction over three and a half months, part of which was spent presenting, explaining and discussing the new product to the Bank of Korea, which has to approve all derivatives transactions.

Now that the first synthetic transaction has been approved, bankers are predicting that more such deals could be offered in Korea. However, JP Morgan Chase officials note that the Korean central bank is likely to keep a cautious approach. "The Bank of Korea is likely to be open to that kind of low risk transaction, as it wants to open the market slowly but surely," said Samuel Park, Hong Kong-based associate in JP Morgan Chase’s derivatives solutions group, credit and rate markets.