For Societe Generale (SG), the onward march of its vaunted cross-asset franchise has led the bank into fertile new territory this year. A concerted push to replicate its supremacy in equity derivatives has delivered lucrative mandates in credit, rates and commodities, while its inventiveness in risk premia strategies has left rivals trailing.
Clients are glowing in their praise. "They are great at making our ideas a reality. Their service is good, as is their responsiveness, and they have strong capabilities in structuring," says Gavin Maxwell, investment manager at UK-based professional services firm Turcan Connell.
"Roughly four out of every nine of our public offerings are with SG," adds an investment manager at a Swedish private bank. "They have really competitive pricing - especially for autocallables, which make up a large portion of the Swedish market - and we do several credit-linked notes (CLNs) with them too, which have been priced strongly for a number of years. They essentially own that market."
Societe Generale also continues to dominate the exchange-traded market in both plain vanilla products and more exotic instruments. The bank's daily leverage certificates, which allow investors to access amplified returns on underlying equity movements, have hoovered up market share in listed markets across Europe since their launch in late 2013. Since the third quarter of 2014, combined volumes for France, Germany, Italy, the Netherlands and Sweden have grown by more than €4 billion ($4.4 billion), and in June 2015 the bank pushed past the milestone of 100,000 in total products listed.
But while SG's structured products franchise continues to draw on the enduring strength of its equity derivatives business, the bank has also made waves in other asset classes this year.
We wanted to bring the characteristics of the most famous equity products into the credit space
"The top asset class that got everyone's interest is credit," says Julien Lascar, head of sales for Europe ex-France in the cross-asset solutions team at SG. "Investors want structured products that offer income, and, right now, credit plays or hybrids of equity and credit are most successful in terms of return."
The bank has launched a new breed of CLNs - one incorporating an autocall mechanism whereby the investment knocks out if the spread on the underlying credit default swap (CDS) breaches a downside barrier, and another replicating the features of an interest rate range accrual, whereby the coupon is accrued for each month the reference CDS spread stays within a predefined range. Both structures offer larger coupons than standard CLNs.
"We wanted to bring the characteristics of the most famous equity products into the credit space. Volatility on credit does not trade as liquidly as it does on equity, and that is where having a global, cross-asset exotics book allows us to be creative and offer attractive pricing," says Lascar.
SG also brought fresh ideas to the market with a ‘rainbow' CLN on the Markit iTraxx Crossover index, where losses are leveraged beyond the first nine credit events on the underlying basket of high-yield names, and a ‘switchable' CLN for conservative players, where 100% capital protection is guaranteed up to and including the first nine default events. The first of those two structures raised more than €50 million across private banks and high-net-worth individuals in France, the Nordic region and Switzerland.
Thomas Decouvelaere, co-head of European pricing and development in the global markets team at SG, says the key to success in the credit market is eliminating client concerns over selection bias. "We have learnt that investors do not want selection bias on credit these days after the over-representation of subprime debt in credit baskets before and during the crisis. This is why our CLN products mainly reference liquid indexes," he explains.
Credit exposure has also been offered to institutional clients as a funding mechanism. One Swiss private bank was looking for a way to fund long call positions on certain commodity indexes without having to sell downside puts on the same indexes. SG designed a solution whereby the client sold protection on a basket of high-yield corporate names and used the premium stream to fund the option purchases. This provided better access to commodity upside than could have been bought using European rates funding, while the client's credit exposure was tailored to a group of corporate names with which the investor was comfortable.
Beyond credit, SG has pulled ahead of its peers in the competitive market for risk premia strategies and smart beta indexes.
"Low rates mean those distributing principal-protected participation products have very little capital they can allocate to the derivatives component. This focuses attention on the engine of performance. We create efficient indexes that provide outperformance versus the benchmark but are cheaper to purchase options on, thereby helping structurers to build attractive products," says Jean-François Mastrangelo (pictured), co-head of the European pricing and development team at SG.
One significant smart beta theme has been sustainability. SG partnered with Belgian index provider Finvex in 2014, acting as sole derivatives writer for a suite of eight of its indexes. The Finvex Sustainable and Efficient Europe 30 Index was launched in April 2015 and generated particular interest in the Nordic region.
"In Scandinavia, it is understood that corporations need to be smarter when it comes to sustainability and investing in ethical products. Most sustainable indexes have been very volatile and have not performed. The difference with Finvex is the two-step screening - first for ethical factors and second for financial ones. This means you always have constituents that are living up to the ethical and performance criteria," says an official at a Swedish bank that offers access to the new index through structured notes and warrants.
SG's in-house cross-asset quant research and engineering teams have also been busy. In 2014 and 2015, the bank launched indexes that combine a basket of investible risk premia strategies with strong fundamentals and low correlation to traditional assets. Since its initial launch in September 2013, the SG Cross Asset Risk Premia index has delivered a Sharpe ratio of 1.29, compared with 0.2 for a diversified portfolio.
"SG is standing out on risk premia," says a portfolio manager at one Nordic asset management firm. "I'm looking at Goldman and Deutsche and they are very good, but SG has a clear view of where it wants to be and what it wants to present, and it is sticking to that. Others have to catch up."
Innovations for insurers
The engine of SG's institutional growth has been its work with insurers in the government bond market. With interest rates remaining near zero around the world, yield-seeking insurers have struggled to generate returns again this year, but a future rate hike could prove more destructive for life assurance companies. Under such a scenario, they could see their bond portfolios fall in value while also facing increased lapse risk - the danger that policyholders will surrender their savings products in pursuit of more attractive returns elsewhere.
SG has been inventive in helping insurers to hedge this risk through its bond repack programme, whereby the fixed cashflows of a government bond are exchanged for a floating coupon referencing a point on the constant maturity swap (CMS) curve. The holder retains the same sovereign risk while receiving coupons that track long-term interest rates. However, the asset swap is typically paid for by the insurer assuming negative spread risk on the CMS or by locking in to a below-par fixed rate for the first few years of the repack's tenor.
The bank eliminated these downsides by adding layers of optionality to the typical structure. In one example sold to a handful of insurers, the buyer sells SG a Bermuda option, allowing the bank to call the repack at par after five years and annually thereafter. In return, the insurer receives a fixed coupon for the first five years that is a full 70 basis points higher than the non-call structure and a 0% floor on the subsequent CMS-linked floating coupons.
"This asset-swap-plus-option structure has been a feature of the market over the past two years, but we have been innovative in pushing the maturity of the option to five years where previous versions have been exercisable after just one," says Decouvelaere. "This achieved the investors' goals of being invested in a credit they understand but with a significant pickup for the first few years and with limited rate risk afterwards."
A second iteration follows a similar formula while adding an asset-exchange feature, permitting SG to swap the underlying for an equivalent value of equity collateral, which is paid for by repoing out the liberated bond. SG has transacted €1 billion in all flavours of repack to both French and Italian insurers since the fourth quarter of 2014.
French insurer Harmonie Fonction Publique has traded three bond repacks with SG this year, for €7 million in total. "We chose SG as a counterparty for these transactions because we have great confidence in terms of the underlying risk and financial soundness of the company. We have been customers of SG for many years, meaning we could test the skills of the teams and the relevance of the choices made," says Laurent Jonack, account director at Harmonie Fonction Publique.
"Bond repacks are a good alternative investment for an insurance company because they improve on the expected returns relative to a corporate bond without the repack effect. This is also a good alternative in a sluggish bond market with very low volatility," Jonack adds.