Interest rates house of the year: Societe Generale

A blockbuster range of steepener products, together with pioneering launches in the Formosa bond market and the China cross-border financing trade, sees Societe Generale ride out the winner in this category for the second year in a row

photo of chak wong from societe generale
Chak Wong, Societe Generale

Societe Generale's cross-asset platform puts it at an advantage when providing innovative hybrid structured products. This is especially true when it comes to multi-asset instruments incorporating a rates component. With benchmark yields mired at historic lows, the appetite for vanilla fixed income among Asian investors is waning - opening an opportunity for the cross-asset team to strut their stuff.

The bank has impressed this year with its suite of range accrual notes referencing the spread between short- and long-term USD constant maturity swap (CMS) rates. These steepeners allow investors to take a bet on the shape of the swap curve and earn fat coupons if the spread remains positive. One particularly eye-catching deal was a 15-year callable range accrual note linked to Korean sovereign risk. Investors can earn a maximum 4.9% a year on principal if the USD CMS 30-year-USD CMS two-year spread trends above zero.

The trade was a big hit in Korea, with $830 million in total tickets sold - with an average clip size of $50 million-100 million. It proved especially popular with pension funds and insurance companies. One client at a Korean life insurer said the note was a winner because of one crucial factor: "The pricing is the best. Our goal is to get the best performing deals and the structured note is a very important asset to fulfil this goal."

Societe Generale has transacted similar steepener products in Korea and Taiwan with five different USD and euro CMS spreads in five different currencies on tenors ranging from four to 15 years, selling a nominal $215 million.

Providing attractive rates products in the current regulatory environment is no mean feat. Long-term rates products are capital intensive for global banks and several houses have scaled back their businesses in the region in recent years. Chak Wong, head of sovereign and financial institutions, Asia-Pacific at Societe Generale says these regulatory pressures have raised the bar for firms looking to stay competitive in this market.

Just being able to provide the same level of services as compared with a few years ago is a big innovation

"Innovation may not be happening on the surface, but it is still taking place under the water," he says. "Just being able to provide the same level of services as compared with a few years ago is a big innovation. Control of the risk has to be much better, our capability in terms of lowering the capital charge has to be better and to provide new products to our clients requires us to jump a higher hurdle than before."

He cites the example of bond repacks referencing Japanese government bonds (JGB) as a product class that is made to look simple to the end-investor, but can be a risk management headache for the dealer. "If you have a JGB repacked into Australian dollars it is quite exotic. It embeds a long-dated cross-currency swap linked to the default of the Japanese sovereign debt. The computation of the credit valuation adjustment and funding cost is very complex."

The bank's cross-asset capabilities, however, have allowed it to flourish in the structured bond space. This year it made the weather in the burgeoning market for Formosa bonds - lightly structured corporate debt instruments issued in Taiwan but denominated in currencies other than the new Taiwanese dollar - landing the bank the deal of the year award.

Societe Generale has also made important steps in the China cross-border financing trade, opening up opportunities for investors to tap capital and benefit from the rate differential between the USD and CNY. For mainland clients, the bank marketed a transaction where the onshore client pledges CNY deposits with Societe Generale China against a bank guarantee to Societe Generale Paris for a USD loan facility to an offshore entity. The offshore entity receives dollar financing while enjoying the onshore/offshore yield differential.

For Hong Kong based-clients owning a non-residents account, Societe Generale also offered an opportunity to enjoy the onshore/offshore yield differential. The client places CNY deposits with Societe Generale China as collateral for a USD loan issued out of Societe Generale Hong Kong, reaping the yield differential from the two currencies on maturity. Fifteen such trades took place between April 2014 and March 2015, for an aggregate loan nominal of $231 million.

The bank maintains a special relationship with the region's insurers. As long-term investors, insurance companies are natural buyers of long-dated fixed income and need dealers who understand their asset-liability matching (ALM) requirements.

The head of fixed income at one Hong Kong-based life company says: "I like their advisory services, and their structuring desk has a lot of actuaries so they are strong [in terms of ALM knowledge]."

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