It's always been a story of firsts for Sweden's Handelsbanken. Magnus Fagerang, the bank's Stokholm-based head of structured products, says Handelsbanken issued its first equity-linked note in 1991, for Sweden, and made the first ever public offering of an equity-linked note for the Norwegian market in 1993. The bank's first exchange-traded covered warrant for Sweden came about in 1995 and Handelsbanken made its first public offering of a capital-guaranteed hedge fund-linked product in February 2002 - available in Sweden, Denmark, and Norway. What's more, the bank again proved its innovative credentials with its first-to-default credit-linked notes in 2002, initially available in Sweden and subsequently Finland. Its first public offering of multi-asset hybrids in April 2005 again debuted in Sweden, subsequently appearing in Denmark, Finland and Norway.
"Our focus is definitely on providing the client with the option of investing in a wide range of underlying assets, while providing excellent liquidity in the secondary market," says Peter Carlberg, Handelsbanken's Stokholm-based vice-president of financial engineering and structured derivatives. "In our experience, this is far more important than exploring exotic payoff functions. We believe that the more complicated the payoff function, the larger is the risk of the client misunderstanding the product. Also, the rationale behind funky payoff structures is often to make the client overestimate the probability of favourable outcomes."
Handelsbanken Capital Markets is active in all Nordic markets (Sweden, Norway, Denmark and Finland) and issues structured products across equity, fixed income, foreign exchange, commodity, credit, hedge funds and multi-asset hybrids. So it's not surprising that Fagerang views the bank as the pre-eminent distributor of structured products across the Nordic region, and the bank's figures appear to back up his claim. In 2005, Handelsbanken sold a total volume of SKr17 billion of structured products to its customers in the form of securities. In 2006, volumes are already up 15%, Fagerang says.
Handelsbanken was also the largest market-maker of warrants and certificates on the Nordic markets for the first nine months of this year, listing a total of 1,022 covered warrants in Sweden, Finland and Norway. Handelsbanken has also listed products such as outperformance certificates and certificates linked to gold and the oil price. And last month, Handelsbanken launched discount certificates in the Swedish market by listing 112 discount certificates linked to 28 different underlying shares in Sweden.
"Handelsbanken has a dominant position on Nordic equity risk, including the largest exotic portfolio," Fagerang says. "We sell Nordic risk to Nordic and European banks and institutions - the volumes of hedges we provide on the interbank market exceed the volumes of structured products we sell to clients."
A typical Handelsbanken equity-linked bond offering might consist of eight tranches, Carlberg notes. Of the eight, five might be of long maturity, at around five years, and three will have an 18-month maturity. The long-maturity bonds are usually based on vanilla options with different underlyings (for example, Bric, baskets of Asian indexes or global baskets). The longer structures are sold at par or at a premium, Carlberg adds. "The shorter structures are usually cliquets structures sold at par. For our public offerings we have used the Topix, SToxx50E and the OMXS30 indexes as underlyings for the cliquets structures. For payoff structures, we have used reversed cliquets - which were arguably more common three years ago - best-replaced, best-capped, all-capped, lock-ins and symmetrical range cliquets. It's all about giving the client choices," Carlsberg says.
The second most common public offering for Handelsbanken is the best-of hybrid, offered in a rainbow-like structure and often linked to equity, fixed-income and commodity underlyings, he adds.
WHY HANDELSBANKEN WON
Handelsbanken is a one-stop shop for structured products in the Nordic region. The bank may be a Swedish powerhouse, but its commitment to all Nordic markets is to be applauded. Its hybrid range, in particular, has been widely praised as evidence of the bank's quest for innovation.