France’s largest bank sold about 20 million euros ($26.7 million) of credit-linked notes to pension funds this year, said Denis Gardrat, the head of European credit structuring at BNP Paribas in London. The securities have traditionally been bought by private banks, he said.
Credit-linked notes, which tend to have higher yields and tailored maturities that may not be available in the bond market, are drawing interest from new investors as companies from the riskiest to the most creditworthy pay close to record- low rates for debt.
“Cash bond investors who have traditionally shied away from synthetic credit products are turning to alternatives, such as credit-linked notes, for the first time,” said Charles Kermisch, a director of European credit and liquidity operations Credit Suisse Group AG in London.
The securities, though suited to so-called buy-and-hold investors such as private wealth managers, are too illiquid for larger asset managers that trade more actively, said Wolfgang Kuhn, the London-based head of pan-European fixed income at Aberdeen Asset Management Plc, which oversees the equivalent of $314.3 billion.
The notes also provide access to the credit derivatives market for pension investors, said Petteri Vaarnanen, head of fixed income at Espoo, Finland-based Tapiola Mutual Pension Insurance Co. “CLNs offer flexibility, and you can create bespoke structures where specific needs can be taken into account,” he said.
Credit-linked notes have been popular among private banks and wealthy individuals who may not be able to buy derivatives such as credit-default swaps. Investors suffer losses in the event of a default by the bank issuing the securities or the linked entity, whether a company or sovereign.
Banks led by Germany’s DZ Bank AG and Landesbank Baden- Wuerttemberg sold $6.6 billion of credit-linked notes this year, according to data compiled by Bloomberg.
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