The London arm of Gulf International Bank (GIB) has announced the successful launch of a $300 million high-yield investment instrument, the Falcon IV Collateralised Bond Obligation (CBO). The London bank, which has just been given the name of GIB (UK), is acting as collateral manager and joint underwriter of the CBO. GIB (Bahrain) and Credit Suisse First Boston are the other underwriters.
The CBO comprises a series of notes whose payments are backed by an underlying collateral of a portfolio of high-yield corporate bonds. Investors are able to select appropriate notes depending on their risk appetite, with the senior notes offering the least risk and lowest returns.
The collateral provides a pool of interest over which investors have differing claims dependent on their choice of note. The various notes involved in the CBO have been accorded ratings from AAA to BB by the US credit ratings agencies Standard & Poor’s and Moody’s Investors Service.
Priority in the six-monthly payments is given to investors holding the AAA notes which are priced at 43 basis points (bp) over Libor. Investors in this senior note are generally conservative and risk averse such as insurance companies, says a GIB (UK) spokesman. Payments are then made to the A rated securities which pay 140 bp over Libor, then to the BBB notes which are priced at either 225 bp over Libor, or 9.429 per cent depending on whether the investor chooses a floating or fixed rate.
The lowest rated note is the BB for which pricing is fixed at 13.479 per cent.
There is also a junior, un-rated tranche, the class E notes whose payments come from the residual cashflow once all the senior notes have been paid. Holders of E notes have the authority to call for the close of the structure once the five-year reinvestment period has expired. For this reason, the managers of the CBO expect it to have a life expectancy of seven-eight years, although the legal maximum of the instrument is until 2012.
GIB (UK), in its previous incarnation as Saudi International Bank, has invested in high-yield bonds since 1986 and launched its first high-yield investor fund in 1989.
The Falcon IV is the fourth CBO that it has managed (MEED 7:10:94).