NAB spends A$400 Million to Hedge

Post by Sharat on October 2, 2008 · Under banking, news · Comment

NAB is insuring against potential further losses in its securities portfolio. NAB owns $A 1.6 Billion portfolio of what are called synthetic collateralised debt obligations. CDO’s are pools of corporate US and European corporate debt that have been repackaged, so that banks or investors can obtain exposure to higher yielding securities without having to compromise on a rating from an agency.

CDO’s were created as a means so that banks which had made loans to corporations or individuals could sell those loans onto other investors or lenders as a security and in doing so, freeing up their balance sheets. They are typically issued in tranches with the various tranches having different levels of risk. They are designed so that lenders could purchase riskier assets than would be allowed under their own regulations.
NAB said that it was hedging this portfolio with an unnamed “large global bank” as its counterparty. The agreement should insulate NAB from the likely hood of any further losses and costs a whopping A$ 100 Million in 2008 and another A$60 Million every year for the next five years thereafter. The total cost of the hedge is A$400 Million which is 25% of the value of the entire portfolio.

“All conduit assets have been reviewed and, as of today, no further material provisioning against this portfolio will be reflected in NAB’s 2008 results,” the bank said in its statement. The hedge is separate from the $A1.01 billion in provisions made in July for other parts of NAB’s CDO portfolio, which were backed by US residential mortgages.