DBS Bank Synthetically Securitizes SGD 2.8 Billion Of Corporate Loans

SINGAPORE, DEC 21 - DBS Bank ("DBS") said today it has synthetically securitized SGD 2.8 billion notional amount of corporate loans. Known internationally as a Synthetic Collateralized Loan Obligation ("Synthetic CLO"), it involves the synthetic transfer of credit risk from a portfolio of corporate loans using credit default swaps without the need to transfer the loan portfolio.

As part of this transaction, a special purpose vehicle, known as ALCO 1 Limited ("ALCO 1"), issued SGD 224.37 million equivalent of Collateralized Notes (the "Notes"). The full proceeds of the Notes will be invested in highly-rated collateral such as Singapore Government Securities.

The Notes settle on December 21, 2001 and have a scheduled final maturity on March 21, 2009. DBS retains the right to call the Notes on December 21, 2005 and June 21, 2006. The Notes, which equate to 8% of the reference portfolio, represent the middle or "mezzanine" layer of risk and hedge the credit risk on a funded basis. The top 87.5% or "super senior" tranche is hedged via unfunded credit default swaps, while the bottom 4.5% or "first loss" tranche is retained by DBS.

The Notes offering by ALCO 1 comprises Class A1 USD 29.55 million and Class A2 SGD 30 million both rated Aaa/AAA/AAA, paying a coupon of 0.50% over three month USD Libor and 0.45% over three month Swap Offer Rate ("SOR") respectively; Class B1 USD 12.15 million and Class B2 SGD 20 million both rated Aa2/AA/AA, paying a coupon of 0.85% over three month USD Libor and 0.80% over three month SOR respectively; Class C of SGD 56 million rated A2/A/A paying a fixed coupon of 5.2%; and Class D of SGD 42 million rated Baa2/BBB/BBB paying a fixed coupon of 6.7%. JPMorgan and DBS were the lead managers for the transaction

The Synthetic CLO allows DBS to reduce credit risk on the reference portfolio of corporate loans. By doing so, DBS is hedged against default risk and at the same time, it achieves a reduction in risk weighted assets, thereby increasing its capital adequacy ratios.