CFO Bonds Linked to the HFRX Index Launched for First Time in Europe

LONDON, UK - Barclays Capital, the investment banking division of Barclays Bank PLC, and Hedge Fund Research (HFR), the leading provider of hedge fund data and indexation, have joined forces to launch a Collateralised Fund Obligation (CFO) for institutional investors seeking exposure to the hedge fund market. The CFO, issued by Barclays Bank PLC, is backed by the HFRX Global Tracker Fund (HFRX Index) and will enable investors to purchase exposure to the index in the form of an investment grade rated bond.

Barclays Bank PLC will offer two types of bonds, both euro denominated with a 10-year tenor, a protected fixed rate coupon and redemption value rated:
§ BBB rated that has a maximum redemption value of 100%. Instead of receiving further return upside, it benefits from a ratings upgrade, as Barclays Bank PLC is the issuer (currently rated AA+/Aa1). It has a coupon of 6.25% pa.

§ A- or BBB rated with full upside of the HFRX Index on the redemption date (or early unwind) with coupons of 5% or 5.5% pa, respectively.
Two key benefits of these bonds are that Barclays Bank PLC pays the fixed coupon and Fitch rates the redemption payments. Therefore, floating rate investors can swap the coupons into Euribor "plus" while facing Barclays risk (AA+/Aa1). Fixed rate investors, on the other hand, can hold a fixed rate bond with no interest rate sensitivity because the valuation is driven solely by the collateral performance.
Backed by a leading, high performing hedge fund index offering an excellent representation of the hedge fund market with daily pricing and monthly valuation, the bond addresses the concerns of many investors regarding hedge fund investing.

Christian Stoiber, Head of Institutional Funds Derivatives Marketing at Barclays Capital said “This product offers investors further diversification in the ABS investment sector especially during times of tight credit spreads. The product will appeal to investors such as pension funds and insurance companies who are looking for effective asset liability matching relying on the attractive risk/return profiles of the Hedge Fund of Funds markets and the capital efficiency of investment grade rated bond investments.”
John Godden, Managing Director of HFR [Europe] commented: “This exciting new product further increases the range of investment products available based on the HFRX Index which has quickly established itself as the tracker of choice for institutional investors and asset managers throughout Europe. We are delighted to be offering this CFO in conjunction with Barclays Capital.”
Contrary to traditional CDOs, CFO bonds are fully transparent and liquid. The bond is equivalent to that of the underlying tracker fund allowing simple and precise valuation. Weekly valuation is available. Monthly liquidity is offered at a 1% bid offer spread and investors can redeem the bond before maturity and receive value that has accrued in excess of the coupon paid. The CFOs are not "cash flow" deals but "market value" deals enabling a rating upgrade should the underlying tracker fund perform according to expectation.

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