South Korea Banks’ Structured-Note Sales Surge to Four-Year High

South Korean banks sold the most structured notes in almost four years in May, taking advantage of a surge in long-term euro swap rates to offer higher coupons.

Issuance jumped 78 percent to 660 billion won ($582 million) in May from the previous month, the most since 815 billion won in sales in June 2009, according to data compiled by Bloomberg, which doesn’t track securities issued by brokerages. About 52 percent of the notes sold last month are tied to euro swaps, mostly comprised of a type known as steepeners that earn more when the gap between long- and short-term rates widens.

South Korean banks are turning to overseas rates to capitalize on higher volatility, which enables them to sweeten terms for certain type of notes, according to J.H. Lee, a vice president of financial engineering at Shinhan Bank in Seoul. Euro swaps surged in May amid signs the global economy is recovering from the worst crisis since the Great Depression, with the 20-year rate jumping the most since last June.

“We have to use these foreign indexes,” Lee said. “The market conditions are turning solidly favorable for steepeners now.”

Demand for the structured notes is “hot” among South Korean insurance companies now, as they seek higher-return investments, according to Chae Kyu Cheol, a Seoul-based researcher at Nice Pricing & Information, a bond pricing agency.

Standard Chartered

All of the euro steepeners were issued by Standard Chartered Plc’s local unit, Bloomberg-compiled data show. In the largest such offering for last month, the lender on May 6 sold 100 million won of notes that track the gap between 2- and 20-year euro swaps, with the coupon capped at 5 percent, according to Bloomberg-compiled data.

Valerie Tay, a Singapore-based spokeswoman for Standard Chartered, declined to comment on the company’s structured-note issuance in South Korea.

The 2- and 20-year spread in euro swaps widened by 23.6 basis points through May from the end of the previous month, according to Bloomberg-compiled data. The differential for won interest-rate swaps with the same tenors gained 13.3 basis points over the same period.

The Bank of Korea unexpectedly cut borrowing costs in May and left the benchmark seven-day repurchase rate at 2.5 percent yesterday.

The 3m10y euro swaption rate, a measure of volatility in three-month options for 10-year interest-rate swaps, rose 11 basis points in May, touching a three-month high of 65.4 basis points on May 29, according to Bloomberg-compiled data. Higher volatility boosts prices for options, allowing structured-note issuers to increase coupons on certain types of securities where the buyers effectively sell the embedded derivatives.

Shinhan Bank this month also issued 160 billion won of range-accrual notes using swaps and interbank rates in the dollar and euro, in addition to the won, Bloomberg-compiled data show. The products pay annualized coupons for days when specific conditions are met.

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