Garantum fills the gap

Garantum Fondkommission is one of the Nordic market's largest structured product distributors and caters to a diverse client base across Sweden, Finland and Norway. Hannah Collins talks to co-founder and partner Thomas Bratt

Despite low interest rates, decreased volatility and prolonged uncertainty, Garantum Fondkommission is seizing on new client demands to deliver innovation in structured products. In 2012 alone, the Swedish distributor offered 250 different products to clients. "Our focus has always been to adapt to the current market situation, the demands of our clients and real-time derivatives pricing," says Thomas Bratt, Stockholm-based co-founder and partner at Garantum.

In Sweden last year, Garantum saw increasing demand for credit-linked structures, according to Bratt. "Normally heavily invested in equities, Swedish investors have now discovered that this asset class could help balance out their portfolios, and that the expected return of many credit-linked structures actually matches that of equity investments in the current market environment."

In response to this change in sentiment, the distributor has focused on offering index-linked investments in credit-based underlyings, which have offered the best risk-reward profile, he says. The products have mainly used the Markit Itraxx Crossover Index and the Markit CDX North America High Yield Index, which are comprised of European stocks and 100 non-investment-grade entities domiciled in North America and distributed among two sub-indexes (Single B and Double B), respectively.

The Société Générale Kickout High Yield Europa 5, for instance, is tied to the iTraxx Crossover Series 18 Index, and gives investors a 7% indicative coupon (paid quarterly) above the three-month Stockholm Interbank Offered Rate (Stibor), provided that no more than five defaults occur during the five-year life of the product. In the event of a sixth default, investors lose 5% of the notional.

In Finland, too, there has been a shift in underlying assets away from equities and into credit, says Bratt. One credit product offered by Garantum uses Nordea Bank Finland as the issuer. The five-year credit-linked crossover high-yield note, Kredithybrid Asien N11, pays an indicative annualised coupon of 2% and is linked to an equity basket consisting of stocks from Vietnam, Indonesia, the Philippines and South Korea – the Asian members of the so-called Next 11 group of emerging markets countries. The product is linked to the iTraxx Crossover Series 18, containing 50 high-yield companies, but credit events do not affect the annual coupon or the return from the equity index basket.

By tapping into the CDS market instead of negotiating with the bank's treasury department, we can achieve better terms in combination with lower risk

In addition to delivering more products based on credit, Garantum has continued to widen its product range. The distributor has recently launched a new type of capital-protected product, in which counterparty risk is spread between three and five banks rather than a single issuer, which is accomplished by entering into credit default swap (CDS) contracts rather than going through the issuing banks treasury department. This means only a part of the notional would be lost in case of default in any of the underlying names, according to Bratt. "By tapping into the CDS market instead of negotiating with the bank's treasury department, we can achieve better terms in combination with a lower risk." The Garantum Allocated Products (Gap) investments represent the future for capital-protected investments, he says.

The Gap AIO USA Export nr 1423, for instance, is a capital-protected note linked to an equally weighted basket of 10 well-known US companies. The issue price is 100%, with indicative participation of 100%, and the capital protection element is diversified between three and five names.

Garantum has also seen an increase in the use of autocallables by clients to "create an opportunity to generate decent returns even in a flat market," says Bratt. A new autocallable from the distributor includes ING as the issuer - the WO Memory Express Phoenix Autocallable Note. It is tied to a basket of four underlyings - the iShares MSCI Brazil Index Fund, the Russian Depository Index, the WisdomTree India Earnings Fund and the Hang Seng China Enterprises Index - and pays a coupon of 10% provided that, on the observation date, the closing level of the worst-performing underlying is equal to or higher than its coupon barrier.

The distributor prefers to use a variety of issuers for its products. "We like to keep credit exposure diversified so that clients do not end up with too much exposure to any one issuer... in the day-to-day selection, we simply try to find the best risk-reward trade-off for our clients." Most of the firm's structuring and pricing is done on the Sophis platform, though it also looks at a few others, including Barclays' Comet and BNP Paribas' Smart Derivatives, says Bratt.

Despite concern that regulatory authorities will fail to appreciate how structured products can make an investment portfolio more efficient, Bratt says Garantum has made a number of return studies on its entire portfolio and is convinced that structured products can play a part in almost any broad investment portfolio. "We hope to be able to communicate these findings to the authorities," he adds.