Structured Notes Tied to Credit Indexes Surge Amid Low Defaults

Structured notes tied to credit-default swap indexes are selling at a record pace as the corporate failure rate declines in Europe.

Nordea Bank AB (NDA), SEB AB and Societe Generale SA (GLE) led $1.7 billion of issuance this year, a 35 percent increase from all of 2012, according to data compiled by Bloomberg. Notes that speculate on the creditworthiness of the 50 junk-rated companies in the Markit iTraxx Crossover Index accounted for 60 percent of the sales, the data show.

“These products now have a recent history of performing well with very few credit events,” said Peter Frosell, head of investment products at Nordea in Stockholm. “They are lower risk than equities, and while the returns may not be as high as with stocks, they are more than deposits and are less volatile.”

Notes tied to default swap indexes allow investors to curb losses should individual companies fail to pay their debts, Frosell said. The failure rate among speculative-grade issuers in Europe fell to 3.3 percent in the third quarter from 3.6 percent a year earlier, according to Moody’s Investors Service.

Nordea was the biggest seller of notes tied to default swaps indexes this year, with sales of $821.6 million, Bloomberg data show. The Stockholm-based lender raised 50 million euros from five-year securities linked to the latest series of the Crossover index on Oct. 9 in its largest sale of the securities.

Credit-linked notes can have higher yields and tailored maturities that may not be available in the bond market. Buyers of the securities, which include private banks and wealthy individuals, typically suffer losses if the issuing bank or the linked entity defaults.

To contact the reporter on this story: Alastair Marsh in London at

To contact the editor responsible for this story: Shelley Smith at

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