Betting on stability

Cover story

Stability notes, also known as market default obligations, have been steadily growing as investment vehicles for the past few years, with most transactions largely structured on classic liquid underlyings such as the Standard & Poor's or Eurostoxx equity indexes. These equity-based notes experienced a surge in popularity between 2004 and 2005, as they provided investors with a payout in the region of 150-200 basis points above Libor. Transactions contained leverage of up to 10 times.