Sidleys cleans up on synthetics

The London office of Sidley & Austin has completed the first known synthetic securitisation in Europe on a portfolio of credit default swaps.

The firm advised Banca Commerciale Italiana as arranger on the deal, where it bought credit protection from an Irish vehicle called Scala Synthetic 2 through credit default swaps on a euro750m (£472.6m) portfolio.

Synthetic securitisations are becoming increasingly common. There is no transfer of assets and the originator does not actually get any cash unless there is a default, so the bank is effectively buying cover from the vehicle. The advantage to the bank is that it can save capital, because if it kept all the obligations on its own books it would have to allow more capital on it.

There have been a number of synthetic securitisations of portfolios of loans or portfolios of bonds, but this is the first on a portfolio of credit default swaps.

The portfolio of credit default swaps is linked to rated, investment grade obligors, and the potential risk to Scala Synthetic 2 is funded by an issue of four classes of floating rate notes. The first three of those have been listed on the Irish Stock Exchange. Sidleys partner Howard Waterman led the deal in London with assistant Andrew Bliss. Irish law advice was provided by John Cronin, Adrian Farrell and Michael Ryan of McCann Fitzgerald in London and Dublin.

Waterman says: “This was a first because of what the portfolio was. There are lots of synthetics going on at the moment. Where the originator is a bank, they’re becoming more and more popular, and the area is now a very big area of practice for us.”

The firm’s last public synthetic securitisation on a loan or debt portfolio was advising Rabobank International as arranger and originator for a synthetic securitisation of a euro2.5bn (£1.57bn) portfolio of debt obligations. That deal closed last May and was led by partners Elizabeth Uwaifo and Robert Plehn.

Waterman says that the face value of his office’s synthetic deals last year was just over $30bn (£20bn). The main partners doing the deals in London are Waterman and Uwaifo.

The firm also acts for rating agency Fitch, which rates a lot of the deals, so is often involved in similar transactions on its behalf. Fitch’s client relationship partners are Graham Penn and Sarah Smith in the London office.