Croatia’s Credit Swaps Spurring Issuance of Structured Notes

Structured notes tied to Croatia accounted for about 30 percent of the sovereign debt-linked securities sold globally this month as investors sought riskier assets amid record-low yields.

DZ Bank AG and JPMorgan Chase & Co. issued a total of $17.1 million of notes linked to the nation, compared with $45.5 million in the whole of 2013 which represented less than 1 percent of the market, according to data compiled by Bloomberg. Credit-default swaps insuring Croatian debt are the worst performing among 28 European Union nations over the past year, rising to 347 basis points, data show.

Croatia, which joined the EU in July, is heading into a sixth year of recession with public debt climbing to 64 percent of economic output at the end of the third quarter last year. That prompted Standard & Poor’s to downgrade the country’s credit rating last week to BB, or two levels below investment grade, citing a “lack of internal growth drivers,” according to a Jan. 24 report.

“Investors are always looking for high yields and Croatia offers an interesting bet for those who can invest in junk-rated bonds,” said Rainer Overbeck, head of structured notes trading at DZ Bank in Frankfurt. The country has a deteriorating risk profile but still offers a degree of safety because of its membership in the EU, he said.

DZ Bank issued 10 million euros ($13.7 million) of Croatia-linked notes on Jan. 23, the largest sale of securities referencing the Adriatic nation since May, according to data compiled by Bloomberg. The notes mature in September 2017 and pay an annual coupon of 3.25 percent, compared with a yield of 3.9 percent for similar-maturity government bonds in dollars.

JPMorgan sold 11.5 million Romanian leu ($3.5 million) of Croatia-linked securities on Jan. 10. The five-year notes, which bear an additional foreign-exchange risk, offer a 210 basis-point premium over Croatia’s dollar-denominated sovereign bond due November 2019, which yields 5.05 percent, Bloomberg data show.

Patrick Burton, a spokesman for JP Morgan, declined to comment on the sale.

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

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