BNP Paribas' credit team has seen an exponential growth in business over the past three years – volumes of structures deals have grown from 11 in 2002 to 142 in 2004 and 120 to date in 2005.
BNP Paribas explains this phenomenal growth through a better product acceptance in the region, and improved regulatory frameworks, a stronger structuring platform for the bank; and the 'snowball' effect of landmark deals.
In 2003, Emmanuel Ramambason, head of credit trading and derivatives Asia, brought the flow-side bond business and credit desks together. At the beginning of 2004, BNP Paribas developed an options and arbitrage team within the credit desk. And in early 2005 the restructuring continued: that group was merged with the existing sales group to become the structured products and arbitrage group, covering all the correlation products and the single-name structured products with optionality and exotic features as well as arbitrage features.
The team in Tokyo now has four structurers, three correlation and options traders and six flow traders; and in Hong Kong, five structurers, two correlation and options traders and five flow traders. According to Ramambason, the team in Hong Kong has now reached a critical mass for execution for the Asia ex-Japan market.
Credit products have become more acceptable in the region. "Our products are now regulated," says Ramabason. "In many countries, there was a question mark over the CDO – but that has been clarified in India and Thailand; that's good news for us." And Japanese investors are now much more comfortable with foreign credit: "This makes it difficult to offer a classical CDO on corporates [in Japan] – the arbitrage wasn't hitting the rates the [investors] were looking for."
Ramambason says BNP Paribas' work has not been as high profile as other banks over the past year, although one deal that can be discussed publicly is the Philippines principal-protected constant maturity CDS spread notes.
"You do not see most of the transactions in the market-place, because they are done at arms length usually with one investor only. We have been very active in this," he says.
In January 2005, the Philippine central bank, Bangko Sentral ng Pilipinas (BSP) introduced new rules to allow the country's banks to invest in CDOs. Philippine banks with expanded derivatives licences can now invest in any tranche of a cashflow or synthetic CDO. Banks without expanded derivatives licences can also invest in CDOs, but only in tranches rated A or above.
BNP Paribas was one of the global investment banks that took advantage of this rule change, and in July 2005 it launched a constant maturity CDS spread note. Its target investor group was the Philippine banks who believed the Philippine CDS curve would remain steep, or steepen further. The principal-protected notes have a coupon payable that is dependent upon the prevailing five-year CDS spread and the one-year CDS spread on each payment date. If a credit event affects the Republic of the Philippines, no further coupons shall be payable.
"These basically enable investors to take a view on the curve, without taking a principal risk on the Philippine credit," says Ramambason. "Most investors make money when a default takes place, or when spreads tighten or widen. But in this type of product we are able to give exposure depending on the shape of the curve. There has been great interest – we traded the structure across Asia, because people can take a view on the shape of the curve."
Another deal in the public eye is the launch of Dynamo notes, managed by Crédit Agricole Asset Management. BNP hopes it will become a benchmark for the fast-growing Constant Proportion Portfolio Insurance (CPPI) market. Dynamo is a credit fund with finite maturity – the structure leverages this short-dated exposure and provides diversification to institutional investors at an attractive risk/return profile. The principal is 100% protected at maturity by BNP Paribas. In August 2005, the bank raised 525 million for the first Dynamo note: the deal has been very popular and BNP Paribas hopes it will become a benchmark CPPI technology.