Credit-Tied Structured Notes Add Range Coupons for Higher Yields

Banks are boosting sales of credit- linked structured notes that pay coupons when stocks or interest rates they are linked to trade within predefined ranges as they seek to offer investors higher yields.

Barclays Plc (BARC) and Standard Chartered Plc are among lenders selling $260 million of credit-linked range accrual notes this year, up from $43.8 million in the same period in 2012, according to data compiled by Bloomberg. The notes typically pay interest for days on which prices of the reference assets trade within a range. A lower coupon or no interest is accrued when the index is outside the preset limits.

Credit-linked securities, which had the best sales in four years in 2012 at $44 billion, are attracting new investors who previously bought notes tied to interest rates or equities, said Aymeric Paillat, the London-based head of credit exotics trading at JPMorgan Chase & Co. (JPM)

“These investors are typically looking for a pickup in yield and seeking structures they are familiar with,” he said.

JPMorgan sold $50 million of the securities tied to the debt of South Korea on March 21 that pay 4.45 percent so long as the 10-year dollar swap rate is between zero percent and 6 percent. The biggest U.S. bank by assets also issued $40 million of 20-year fixed-rate notes on March 13 tied to Asia’s fourth- biggest economy that pay 3.7 percent, Bloomberg data show.

Accrual Securities

Credit Agricole SA (ACA) raised $50 million from selling 10-year range accrual securities on March 15 tied to the debt of Israel. The notes pay 5.15 percent so long as the three-month London interbank offered rate for dollar loans is between zero percent and 6 percent.

Only two other notes have linked Israel’s debt this year -- a $5 million security from Goldman Sachs Group Inc. with a floating rate coupon that initially pays 1.93 percent and a $2 million note from Societe Generale SA that has a fixed coupon of 1.8 percent, Bloomberg data show.

Issuers are also adding extra layers of risk to notes to enhance yields. Lenders sold $156.2 million of credit securities that are linked to other assets, such as the U.K.’s FTSE 100 index, from $28.9 million a year earlier.

Bank of America Corp. raised $39.5 million from selling notes tied to the South African government. The securities pay 0.9 percent plus 46.5 percent times the performance of the FTSE 100 from the issue date until March 2014, after which investors receive three-month dollar Libor plus 180 basis points, Bloomberg data show.

Investors in credit-linked notes are exposed to the credit risk of the bank issuing the securities and the reference entity, which can be a company or a government. The extra returns available from buying the notes of riskier issuers has fallen as credit-default swaps for European and U.S. banks remain below last year’s highs and credit spreads for most underlying assets also tightened, cutting potential yields.

To contact the reporter on this story: Alastair Marsh in London at amarsh25@bloomberg.net

To contact the editor responsible for this story: Paul Armstrong at parmstrong10@bloomberg.net

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