Credit-Linked Notes With Coupon Step-Ups Reach Record in Europe

Sales of credit-linked notes with coupons that increase during the life of the security have soared to a record in Europe.

Germany’s Landesbank Baden-Wuerttemberg led $3.59 billion of issuance of the step-up securities in the year through Oct. 30, almost 10 times more than the $375 million sold in all of last year, according to data compiled by Bloomberg.

“Central banks have flooded the market with liquidity, meaning companies are unlikely to run into trouble in the short term, but long-term solvency issues have not been solved by measures such as quantitative easing,” said Nordine Farsi, head of structured credit trading at LBBW in London.

LBBW sold 100 million euros ($130 million) of six-year step-up notes tied to Daimler AG’s debt last month. The difference between the cost of insuring the carmaker’s debt for one year and five years with credit-default swaps, a key pricing component for the notes, was 84 basis points, up from 63 basis points Sept. 17, data compiled by Bloomberg show.

The wider spreads for Daimler and other companies including insurer Allianz SE allows banks to create step-up products with more generous coupons for investors.

BNP Paribas SA, UBS AG and Credit Agricole SA are among other lenders to issuer credit-linked notes with step-up coupons this year, Bloomberg data show.

Structured notes package debt with derivatives to offer customized bets to investors while earning fees and raising money. Derivatives are contracts whose value is derived from stocks, bonds, currencies and commodities.

A basis point on a credit-default swap protecting 10 million euros of debt from default for five years is equivalent to 1,000 euros a year. Swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent should a borrower fail to adhere to its debt agreements.

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