There was arbitrage-driven issuance in a variety of non-core dollar currencies in late May and early June, with Swiss francs also seeing swapped issue flow. Tight swap spreads limited euro and dollar arbitrage, but there were still substantial swapped bonds sold.

There was heavy flow of swapped Hong Kong dollar issuance in terms of the number of new deals priced, with many of the deals also large by the standard of the local market, which often sees issues placed for HK$500m ($64m) or less. Among the larger swapped deals, were a HK$1 billion 18-month and HK$800m three-year bond from Rabobank and  a HK$600m 18-month issue from Commonwealth Bank of Australia. GECC swapped a HK$500m threeyear deal, and also issued a swapped Singapore dollar bond, in the form of a S$200m ($115m) five-year issue.

Scattered swapped bonds in Australian and New Zealand dollars took advantage of appetite from Swiss and other European retail investors for the relatively high coupons on offer. General Electric was active in the Australian dollar market with a deal split between A$200m in the three-year and A$200m in the five-year.

Among swapped New Zealand dollar bonds, was a NZ$100m sixyear deal from BNG, which went to floating rate euros. BNG also issued a swapped long end Swiss franc bond, in the form of a Sfr200m 2015 issue. The Swiss franc deal priced at eight basis points under Swiss franc Libor, which offered an attractive margin under Euribor after a basis swap, given the relatively long maturity.

The Swiss franc market also saw a debut issue in the sector from CDC Ixis, which was swapped to floating rate euros. The issue came with a Sfr300m seven-year tranche and a Sfr200m ten-year leg. Both mature after the 2007 end to the formal French state guarantee for CDC Ixis, but the borrower was still able to swap the debt at below Euribor. Other swapped Swiss franc deals included a Sfr300m seven-year issue from Landesbank Baden-Wuerttemberg and a Sfr250m eight-year issue from Kommuninvest.

BNG followed up its Swiss franc bond with a swapped $1bn five-year deal in the second week of June. The deal priced at 34bp over the Treasury, or 1bp over dollar Libor, before the final swap to floating rate euros. This was less attractive than its longer dated Swiss franc bond, but the US dollar market continues to offer a combination of reasonable arbitrage and the opportunity to raise a large amount of money in one deal.

Meanwhile, a Republic of Austria $1bn ten-year bond came at a more attractive post-swap level than the BNG issue. The deal priced at a tight 13bp over the Treasury, or 20bp under Libor, before the final swap to euros.

Euro swap spreads moved even tighter to the bund yield curve, which severely limited arbitrage opportunities for most borrowers but some issuers went ahead with swapped deals anyway. BNG also showed up as a swapped euro deal issuer, with a €1.5bn three-year deal, and LW Rentenbank swapped a €1bn seven-year bond to floating. .

• Synthetic collateralised debt obligations (CDOs) are experiencing explosive growth in the European market, says S&P. "48 synthetic CDOs were publicly rated in 2002 versus 17 in 2001, taking the share of these types of CDOs to 69% from 40%, while 34 have already been publicly rated in the first quarter of 2003 taking the share up to 94% for the quarter," the agency explains. It adds that, when privately rated transactions are included, the share of all European CDO transactions that synthetic CDOs command rises further, to 83% for 2002 issuance and 96% for Q1 2003 issuance. S&P believes that the main driver of the overall European CDO market is the issuance of small investor-driven single-tranche arbitrage trades backed by synthetic CDOs.  Another trend being witnessed in European CDO transactions is the increased interest in having some level of management or substitution rights within these transactions, rather than  maintaining a static reference portfolio. This trend is, to some extent, a response to the number of downgrades and defaults seen in CDO transactions over the past 18 months, particularly apparent in synthetic transactions with small, static pools. "A further development in the market has been the continued expansion by CDO collateral managers of the types of assets  under management," S&P comments. "We are beginning to see CDO pools containing such assets as diverse as leveraged  loans, ABS, credit default swaps, and esoteric  assets such as private equity and hedge funds of funds."
• Asset-backed commercial paper sponsors have been turning to a variety of solutions to maintain the ratings on their conduits when a liquidity provider is downgraded. In a recent report, S&P describes several different strategies and finds that, although a number of the approaches to maintain a conduit's rating are tried and tested, others, such as the use of put option agreements, are new twists on existing methods.
• S&P has issued its global rating criteria for structured transactions with multiline insurance guarantees. "The tremendous growth of the structured finance market and its new products, coupled with investor interest in risk-specific credit enhancement products, has opened up the market recently in credit enhancements for capital market transactions to companies that previously have not participated," the agency explains.  
• According to S&P, the scope of hybrid corporate securitisations has broadened across jurisdictions, time  horizons and asset classes. One example of this is the imminent US dollar asset-backed CP programme, Arth Capital Corp arranged by Deutsche Bank, which involves a larger number of jurisdictions than any securitisation to date. The agency explains that "the seller is incorporated in Switzerland, while the collateral will be stored in warehouses in up to seven additional European jurisdictions, plus Singapore". Other assets securitised in continental Europe have included lottery revenues in Italy.

Alan Smitlec