Financial Instruments and Markets: A Casebook

13

Nexgen: Structuring Collateralized Debt Obligations (CDOs)

Luc Giraud, CEO of the structured finance solutions provider Nexgen Financial Solutions, put down the phone. It was January 2004, and he had just received a request from the bank ABC. The call had concerned a client that ABC couldn't fully serve on its own. They hoped Nexgen could help with one of its tailor-made solutions.

ABC's client wanted to add AAA-rated bonds to its portfolio, but ABC had not been able to find suitably priced top-rated bonds in the market. Instead of buying the bonds directly from the market, ABC now wondered if Nexgen couldn't find a solution. Giraud's contact at ABC had explained the situation, “There are not enough triple-As out there since most are held by buy-and-hold investors. We do however own plenty of lower-grade bonds already. Could you find a way to increase their credit quality? We want to be able to give our client returns as if they held top grade bonds.”

Nexgen had been founded three years earlier and marketed structured capital solutions with a focus on tailor-made financing and risk transfer services. An assignment like this was exactly what they were created to do and Giraud was certain they could find a solution for ABC's client. Once they found a structure, though, they would also have to figure out what a fair fee for their services would be.

NEXGEN FINANCIAL SOLUTIONS

Nexgen Financial Solutions was established in Dublin in April 2001 by Luc Giraud and Ravi Viswanathan. The ...