Investor demand for Asian hybrid products growing

Growing numbers of Asian investors are turning to structured credit products in order to benefit from enhanced yield in an environment of low interest rates and tightening credit spreads, says Patrick Kwan, director of debt capital markets and investment banking at Barclays Capital in Hong Kong.

"With credit spreads coming down as much as they have and the lack of appetite for pure exotic interest rate and currency risk, people are looking for new yield-enhancement products," said Kwan. "I think credit-linked notes with a simple interest rate overlay are just a natural progression."

Credit-linked notes with embedded corridor or ratchet notes – the former where the investor receives a enhanced yield if the underlying rate stays within a pre-determined range, and the latter where the gains of the underlying rate are capped in return for a higher yield – are starting to see buying interest from private banking clients and high-net-worth individuals across Asia.

This demand has emerged particularly over the last month, and is likely to remain until the end of the year, Kwan said. “We do see more and more acceptance of the idea, mainly due to the fact that there are not a lot of alternatives out there.”

Future developments could include a basket of credits, with embedded interest rate or forex options, Kwan added.