The $196 million, Falcon 94 collateralised loan obligation launched in September will generate returns of 12-13 per cent a year for five years, says Saudi International Bank (SIB), which organised the deal with Morgan Stanley & Company of the US.

The London-based consortium bank, which is 50 per cent owned by the Saudi Arabian Monetary Agency (SAMA - central bank), acted as underwriter and serves as collateral manager for the deal's senior debt. SIB was also responsible for placing the equity. It is the second deal of this kind the bank has completed in the past three years.

The deal involves the acquisition of a portfolio of high-yield bonds issued by about 30 US companies. This has been financed with $168 million worth of collateralised floating rate notes (FRNs) and a $28 million equity placement. The senior debt comprises $106 million of five-year secured FRNs, $55.5 million of seven-year secured FRNs and $6.5 million of second- priority secured FRNs.

The equity is in the form of subordinated notes. These have been placed by SIB with Middle East institutions.

SIB says identifying equity investors was a challenge. 'You have to find someone who is prepared to accept the investment argument,' says an SIB executive. 'It is not everyone who is inclined or able to understand this kind of investment instrument. People are used to bonds and equities.'

SIB, which has been active in the high-yield market since 1985, says it is probably the largest manager of high yield deals outside the US. The bank says the activity is an important source of income, but that the high-yield business will develop gradually. Says an executive: 'I think there will be steady rather than spectacular growth.'