Euro Swap-Tied Note Sales Surge in South Korea as Yields Decline

Sales of structured notes tied to euro swap rates are surging in South Korea this year, as the country’s issuers look beyond falling local benchmark yields to generate attractive terms.

Issuance of the securities since Dec. 31 through February jumped 80 percent to 360 billion won ($324 million) from 200 billion won in the first two months a year earlier, according to data compiled by Nice Pricing Services Inc., a bond-pricing agency in Seoul. The notes, so-called steepeners, earn more when there’s a wider gap between long and short-term euro swap rates.

South Korea’s three-year sovereign bonds dropped to a record low of 2.61 percent on March 13 amid forecasts of a slowing economy. The difference between the country’s 20- and two-year won interest rate swaps was 49 basis points as of March 13, less than a third of the spread in euros, according to Bloomberg data, making it more challenging to create steepeners using local benchmarks.

“You can’t create attractive notes with local yields now,” said Shin Dong Jun, a fixed-income analyst at Dongbu Securities Co. in Seoul. “Issuers are creating them by mixing overseas rates.”

All of the euro-swap notes sold this year were issued by Standard Chartered Plc’s South Korean banking unit, the country’s top issuer of rate-linked structured notes last year.

The securities, sold in five offerings from January to February, pay 4.5 percent to 5.86 percent annually in the first two years before tracking the spread between the 20-year and two-year constant maturity swap rates in the euro, according to the data from Nice. The coupons are capped at levels ranging from 6 percent to 7.5 percent.

Chung Han Young, a Seoul-based spokesman for Standard Chartered, wasn’t immediately able to comment on the reason for the increase in issuance of the securities when contacted by phone.

Issuance of total rate-linked notes in South Korea rose 23 percent to 900 billion won through February this year from the same two-month period in 2012, according to the Nice data. Apart from the steepeners, the rest of the sales involved so-called range accrual notes linked to swaps and the London interbank offered rate in U.S. dollars. The products pay coupons only for days when the reference gauges remain in certain bands.

Standard Chartered accounted for 83 percent of total issuance this year, boosting its share from 34 percent in the same period a year ago, the Nice data show.

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