BNP Paribas prepares seventh Japan synthetic CDO

French bank BNP Paribas is preparing to close its seventh Japanese synthetic arbitrage collateralised debt obligation (CDO) under its Serena Finance programme, according to a senior Tokyo-based official at the bank.

The five-year deal is referenced on a portfolio of 72 credit default swaps worth ¥72 billion ($600 million). BNP Paribas has already closed ¥180-billion worth of synthetic CDOs using its Serena Finance vehicle.

The official added that although the transaction is expected to close soon, the structure has not yet been finalised.

Like other Serena Finance deals, the latest transaction will be rated by local Japanese rating agency Rating and Investment Information (R&I) and sold to Japanese investors.

As part of the deal, special purpose vehicle Serena Finance will issue five classes of credit-linked notes rated AAA, AA+, A+, BBB+ and BBB- by R&I. It would then use the proceeds to buy Japanese government bonds (JGBs).

At the same time, Serena will sell credit protection to BNP Paribas on the reference portfolio, for which it will receive a premium. Serena will use the income from the JGBs and its credit default swap with BNP Paribas to service the debt on its notes issue.