Morgan Stanley Leads Rise in All-or-Nothing Structured Notes

Morgan Stanley, Standard Chartered Plc and Credit Agricole SA are selling the most structured notes in two years where returns are linked to the U.S. dollar’s relationship to China’s yuan and the Japanese yen.

The banks sold $93.6 million of notes with so-called digital coupons this month, accounting for the entire market and following no issuance in December, according to data compiled by Bloomberg. That’s the most since $134 million of sales in January 2011.

Digital coupons, also known as all-or-nothing interest payments because they’re payable only if certain conditions are met, are popular with investors because they can generate higher returns. Volatility in China’s currency is close to the lowest in 10 years and correlation between currencies such as the Australian and Taiwanese dollars is near the closest to zero in five years, Bloomberg data show.

“Digital coupons offer a payout that is linked to a straightforward view” of whether a currency will appreciate or depreciate against another, said David Naville, head of foreign-exchange structuring for the Asia-Pacific region at Barclays Plc in Hong Kong. “If the view is right, the coupon is paid. Otherwise it’s not.”

Morgan Stanley, the sixth-largest U.S. bank by assets, raised 346.4 million yuan ($55.7 million) from one-year notes tied to the Chinese currency this month, Bloomberg data show. The securities pay coupons as high as 8.6 percent as long as the yuan appreciates by as much as 1 percent or more in Hong Kong’s offshore market, or else nothing. Noel Cheung, a spokeswoman for the bank in Hong Kong, declined to comment on the bank’s notes.

Standard Chartered

Standard Chartered sold 101.5 million yuan of one-year notes on Jan. 7 that pay 6 percent if the offshore yuan is less than or equal to 6.24 per dollar. If it ends above that level, investors will be paid 0.25 percent, Bloomberg data show.

Credit Agricole raised $21.5 million from two 10-year offerings this month, including an $11 million note that pays 6.5 percent as long as the Australian dollar is worth $0.86 or more U.S. dollars and the greenback can buy 27.5 or more of Taiwan’s currency. The bank also sold a $10.5 million note that profits if the dollar gains against the yen and remains at or below 6.37 yuan, Bloomberg data show.

High Coupons

France’s third-largest lender, which is rated A2 by Moody’s Investors Service and A by Standard & Poor’s, offered the notes with coupons that can be 3.5 percentage points above where European banks with a Bloomberg composite rating between A- and A+ can raise funding in dollars for 10 years, according to Bloomberg Valuation data. The bank was able to create the notes with high coupons because the correlation between the currency pairs is low, said Christine Lefort, Paris-based global head of foreign-exchange and precious metals research and development.

Baskets that contain components that are less correlated to each other are less volatile, making options embedded in the structured notes cheaper to buy.

Daily price moves in the exchange rate between the U.S. and Australian currencies are .09 percent correlated with those in the rate between the U.S. and Taiwanese dollars, Bloomberg data show. A correlation of 1 indicates two prices move exactly together.

Structured notes package debt with derivatives to offer customized bets to investors while earning fees and raising money.

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