13 Nov 2012, Hannah Collins, Structured Products
Société Générale (SG) has led the way in the Nordic region with its ability to capture shifting market sentiment and seize opportunities to provide new products for clients.
While selling volatility through autocallables gave investors a good way to enhance yield last year, "they still took a large risk," says Mikael Anden, head of Nordic retail structured products at SG in London. "So this year investors started to look at other products where they could still achieve a good coupon."
Société Générale's answer was credit. In 2012, the bank took advantage of a year of low volatility combined with relatively high credit spreads to bring the first public offerings of credit products to the Swedish and Finnish markets, says Henrik Ottosson, London-based managing director, cross-asset solutions and head of sales, Nordic region at SG. The Itraxx Xover Income Note 26-to-50 to Default allowed retail investors to invest in credit indexes for the first time, according to the bank.
"With great flexibility and strong structuring capabilities, SG has created some very popular and interesting products," says Mats Eriksson, structurer at Stockholm-based distributor Garantum Fondkommission, (which has been offering credit-linked investments to clients).
"The market has totally shifted to credit," says Anden. "It's now about 85% of what we do." Today, almost 25% of the Nordic market is in credit products, and SG represents about 95% of the business, he adds. "By the end of the year, it could even be half of the market," he adds.
The Itraxx Xover Income Note 26-to-50 to Default provides an exposure to the credit market via the iTraxx European Crossover Index - Series 17, the most widely traded of the European credit indexes, composed of the 50 most liquid credit default swaps on European sub-investment grade entities, as defined by SG's analysis. The coupon and notional repaid at maturity depends on the number of credit events that occur, decreasing (in a linear fashion) only after the twenty-sixth credit event. If fewer than 26 index constituents default, the strategy pays an annual coupon of 5-6% and, if the same holds over the five-year term, the investor gets all their initial investment back at maturity.
The bank sold €25 million of the product in the week after its launch. "This is very defensive, because investors are protected against the first 25 companies. You need more than half the companies in the index to default [for there to be a loss]," says Anden. Most of the sales were to retail.
The bank insists that the product can beat inflation in a safe way. "You should never say never, but it is near impossible for there to be a loss because there has never been more than six credit events in a year," says Anden. "We have developed a niche and, so far, no other bank has been able to replicate the product."
The shift from capital-guaranteed products to income structures in the Nordics is another trend that SG has capitalised on, according to Ottosson. In 2012, the bank combined the two themes in its Capital Protected Autocall, which embraced the features of an autocall but without risk to capital. SG was the first to create such a product and was the only bank in the market to offer such a combination.
Linked to four Swedish equities and with a maturity of five years, the Capital Protected Autocall can pay around 8% annually as long as none of the stocks falls by more than 20%, and kicks out early if all the stocks have performed positively on any annual observation date. It was one of Swedish distributor Erik Penser Bankaktiebolag's most successful products this year, according to David Envall, head of structured products at the distributor.
Other popular products from SG are its emerging markets and multi-asset tactical trend allocators, both of which are fully capital-guaranteed structures that offer a dynamic exposure to emerging markets and cross-asset classes, respectively. On a monthly basis, the strategy shifts between emerging markets equity baskets (for the emerging markets product) and between multiple asset classes (for the multi-asset product), depending on the price momentum of the previous six months. To offer protection, the strategy allocates a 50% weight to the market with the highest price momentum, 30% to the second, and 20% to the third. The fourth- to sixth-placed performers have zero allocations.
Société Générale was chosen by distributor Carnegie Investment Bank as the provider for its emerging markets and multi-asset momentum product. "It was the most innovative bank in terms of underlyings, combined with very competitive pricing," says Josef Marin, head of retail structured products at Carnegie in Stockholm. The emerging markets product includes exotic indexes such as the Taiwan SE Weighted, MSCI Malaysia and Istanbul SE National 30 indexes. The multi-asset product has a foreign exchange index basket, as well as equity baskets including the OMX Stockholm 30 and a commodities basket based on the S&P GSCI Excess Return.