Asian investors look to structured credit

One such product is a credit-linked note (CLN) with embedded interest rate structures, aimed at boosting the yield on a traditional CLN, said Gilbert Tse, managing director and head of structured derivatives at SG, part of French bank Société Générale, in Hong Kong. “The product can offer enhanced return to investors based on a specific view or risk appetite of the investor, in both market and credit risk,” he said.

This hybrid structure combines a CLN and a Libor corridor or call, so investors can achieve an enhanced return if Libor moves within a predetermined range. “It’s actually good value as long as the investor has a clear view on the evolution of Libor,” Tse added.

The tightening of credit spreads and rock bottom interest rates have made these structures increasingly appealing to institutional investors and high-net-worth individuals around the region, added Jawahar Chirimar, senior vice-president and head of credit trading at Lehman Brothers, based in Tokyo. “As spreads have tightened, investors are again starting to look at the hybrid products,” he said.

Lehman Brothers has also actively marketed a variety of structured credit products to investors around the region. “We trade all kinds of credit products, such as CLNs, baskets, combinations of credit and interest rates, and synthetic collateralised debt obligations (CDOs),” he added. “The raw material is the credits, then we can structure it in any way, depending on what investors want.”

Asian investors are showing a growing appetite for synthetic CDO products, and Lehman’s Chirimar said the bank has structured several on a private basis in Asia. “There’s an amazing amount of talk about it. We have done some executions and we are hearing of others in the market,” he said.

SG’s Tse agrees with Chirimar about the pick-up in investor interest for synthetic CDOs since the turn of the year. SG has marketed synthetic products incorporating US and European names to Asian investors. “These days, investors are interested in global deals involving US and European names, not just Asian credits,” Tse said.

He added that activity in Asian name synthetic CDOs is still limited, partly due to the lack of variety of Asian credits traded in the credit default swaps market – only 30-40 names are traded regularly. But the bank has been active on a private placement basis, and is thought to have been involved in a balance sheet synthetic deal for the Industrial Bank of Taiwan earlier in the year. Tse declined to comment on this deal.

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