National Australia Bank, which owns Bank of New Zealand, has announced hedging plans to reduce risks associated with its A$1.6 billion portfolio of Synthetic Collateralised Debt Obligations (SCDOs) and associated off balance sheet vehicles known as 'conduits'. CDOs have been often described as 'toxic' debt during the Credit Crunch, with many of the CDOs made up of sliced and diced sub-prime mortgage loans that have now gone partly sour. NAB said it had entered into long-dated hedges with a "large, highly reputable, global bank counterparty" to strengthen its position and reduce the chances of losses from the CDOs and conduits. These measures would reduce NAB's cash earnings for the financial year to September 30, 2008 by A$100 million and cost about A$60 million each year for the next five years, totalling up to A$400 million, it said. NAB said, however, that the A$60 million hedging costs would be within normal budgets for hedging costs and therefore not impact earnings for 2008/09 and beyond. "The new protection levels mean that the SCDOs would be able to withstand corporate default rates equivalent to the worst of those experienced over the past 90 years," NAB said.
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