Standard & Poor's has rated the first public collateralized loan obligation (CLO) comprising small corporate loans originated in France, according to Eric Tanguy, an associate director in Standard & Poor's Structured Finance Ratings group in Paris. The issuer, Dijon Finance 99-1, sold 64.1 million euro floating-rate certificates due 2011. The transaction was broken out into two tranches: class A was rated 'AAA' and priced 32 basis points over Euribor; class B was rated 'A' and priced 100 basis points over Euribor. Goldman Sachs Group L.P. was the underwriter.
Before the transaction could be rated, it was necessary to determine the credit quality of the underlying loans. The loans were originated by Société de Développement Régional Centrest, a state-sponsored financial institution that specializes in lending to local development projects. A small institution, it did not have an internal rating scale and none of the obligors had been rated by Standard & Poor's.
The rating process involved a three-pronged approach. Analysts in the Standard & Poor's Corporate Ratings group in London analyzed the most significant obligors in the loan pool. Next, the pool's weighted average rating was derived, based on the historical default levels of the obligors in the pool. Finally, it was adjusted for each obligor to reflect four factors: seasoning, level of amortization, delinquencies, and defaults. "Obviously, a key factor in the rating process was the fact that most loans were amortizing," Mr. Tanguy said. "While uncommon in the U.S., this is fairly common in France and in Europe overall when it comes to long-term small and mid-sized corporate loans."
The Dijon transaction came after a series of comparable deals in Germany that were sponsored by major German banks. They include Gear 1998-1 Ltd. by Deutsche Bank AG, CORE 1998-1 Ltd. and CORE 1999-1 Ltd. by Bayerische Hypobank, and GELDILUX 99-1 Ltd. by Vereinsbank AG. Sizing of the coverage levels in the German deals was based on an actuarial approach. The new approach, developed jointly by the Corporate Ratings group and the Structured Finance Ratings group for Dijon Finance, will help smooth the way for future deals of this type because small and mid-sized corporates in Europe are much less likely to have credit ratings than those in the U.S.
Standard & Poor's had rated transactions similar to Dijon Finance in the past but they were either funded through asset-backed commercial paper conduits or they were privately placed. The only public CLO of this general type was Serail PLC, but the assets were term bonds of large corporate loans and they were large rated loans, rather than small, unrated corporate loans. Clearly, Mr. Tanguy said, interest in this type of transaction is certainly growing in France, as in the rest of Europe.
