New credit structures appear in Asia

A handful of banks have begun marketing increasingly complex credit structures to yield hungry institutional investors in Asia, amid low interest rates and under-performing stock markets around the region.

One of the most recent innovations allows investors to take a view on a basket of three different rated credits for varying durations. So, the investor can obtain exposure to all three credits for the first two years, the two highest rated credits for the next two or three years, and the best rated name for the remainder of the investment.

The structure is designed to cater for investors that want the yield pick-up that a lower rated credit offers, but are unable or unwilling to take exposure to that credit for the full term of the investment.

UBS Warburg has begun marketing its version of the product – dubbed wedding cake because of its tiered structure - to investors in the region. For example, the basket may contain exposure General Motors Acceptance Corp (rated BBB+ by ratings agency Standard & Poor’s), The Republic of Korea (rated A-) and GE Capital (rated AAA). After two years, the most risky credit drops out of the basket; after another few years, the next lowest rated credit drops out, leaving the investor with an exposure to a high rated credit until maturity.

However, the investor receives an enhanced return throughout the life of the investment, despite the fact that the most risky credit, in this case, General Motors Acceptance Corp, is removed after two years, says Philip Tsao, managing director and joint head of debt capital markets group, Asia, at UBS Warburg, based in Hong Kong.“The investor gets to utilise short dated credit lines to weaker credits and still enjoy the higher interest yields on longer dated notes,” he says.

Deutsche Bank is also marketing this structure to investors in the region, which it calls the credit optimiser. The product effectivley raises the average rating of the basket, making it more palatable for investors in Asia that may not have internal approval to invest in lower rated credits individually, adds David Lynne, managing director and co-head of local fixed-income and derivatives trading at Deutsche in Singapore. "The client may not be able to buy the poorer credit individually, or it may not be available for a shorter duration."

The product is expected to be particularly popular among investors in Singapore and Korea, who have demonstrated a voracious appetite for structured credit products such as credit-linked notes with embedded range accruals, over the last few months.