Bond-Swap Divergence Fuels Portuguese Credit-Linked Note Sales

Sales of structured notes tied to Portuguese corporate debt climbed to a record this year as issuers seized on a distortion in credit markets fueling disparities between bonds and derivatives.

Banks issued about $220 million of securities linked to credit-default swaps on companies led by Portugal Telecom SGPS SA compared with $92 million in the first half of 2013, according to data compiled by Bloomberg. The cost of five-year contracts insuring the phone operator exceeded a measure of bond yields by as much as 92 basis points on March 20 before falling to 40 basis points yesterday, Bloomberg data show.

Investors are buying Portuguese credit-linked notes as the economic recovery pushes down bond yields. The nation is approaching the end of its bailout program and the government has raised its forecast for growth this year to 1.2 percent from a decline of 1.4 percent last year.

“There is a lot of confidence in Portuguese names at the moment,” said Marta Carvalheiro, director for structured products sales at Banco Espirito Santo de Investimento SA, the investment banking unit of Portugal’s second-largest lender. “Before we had requests mostly from institutional clients, now they are retail investors, high-net worth individuals looking to buy structured notes.”

Portel’s Popularity

Portugal Telecom was the most referenced corporate credit for structured products sold globally this year, with $183 million notes issued in the last 30 days, according to data compiled by Bloomberg. Five-year notes linked to the phone company issued last month pay a coupon of 5.5 percent and yielded 210 basis points more than Portugal Telecom’s 5 percent bonds with the same tenor, the data show.

The bond-swap difference, or basis trade, compares the cost of credit-default swaps with the extra yield investors demand to hold bonds over swaps.

Portuguese toll-road operator Brisa Auto-Estradas de Portugal SA was the most referenced entity for credit-linked notes in the fourth quarter of 2013, with sales totaling $176 million, Bloomberg data show. Three-year notes tied to the company yielded about 182 basis points more than Brisa’s similar-maturity bonds when the structured product was issued on Oct. 8, according to Bloomberg data.