Merrill Lynch launches first rated CFXO

Merrill Lynch has launched the first full rated and managed collateralised foreign exchange obligation. The product is being managed by Crédit Agricole Asset Management, and rated by Standard & Poor's.

The bank expects to generate between e500 million and e1 billion from the structure, but declined to give details of individual deals done. It did however say that between five and 10 deals linked to the equity tranche were closed over the last month with institutional investors in Europe. Bigger deals on the rated tranches are expected to close across Europe by mid-June.

The deals can have maturities of three to five years. Merrill expects the AAA-rated tranche to pay coupons of 80–100 basis points, and the equity tranche to return around 20%.

The underlying portfolio will be a basket of about 10 currency pairs at any one time, selected by the manager from 25–30 currencies from the G10 and the most liquid emerging markets.

The product is being marketed to insurance companies, pension funds, private clients and banks on a roadshow in Europe and Asia over the coming weeks, to be followed by a marketing campaign in the US. "Having a rating on senior tranches and a quality manager makes this deal accessible to new types of investors who have not had the capability to invest in FX before," said Nicholas Rabeau, the bank's head of rates and FX exotics trading in London.

"There is general demand from investors to diversify their portfolios after the last five years of money flowing into credit, and FX remains an asset class that offers exceptional value to be captured," added Atanas Bostandjiev, Merrill's head of structured rates and FX marketing in London.

Barclays Capital launched its first privately-placed CFXO in late 2006 – see BarCap structuring second collateralised forex deal.