Banks Extend Maturities of Credit-Linked Notes to Boost Yields

Global banks are boosting payouts to investors in credit-linked notes by extending maturities on the securities to the longest since before the financial crisis.

The average number of years to maturity of notes tied to corporate and sovereign credits climbed to 5.3 this year, the highest since 2007, according to data compiled by Bloomberg. Sales of securities due in six years or more jumped 21 percent to $3.9 billion even as total issuance of credit-linked notes fell 40 percent from the same period last year, the data show.

“We used to sell five-year notes, now it’s more seven or 10 years as our clients are looking for yield,” said Rainer Overbeck, head of structured notes trading at DZ Bank AG in Frankfurt, the world’s largest issuer of credit-linked products. “It’s hard to come up with a 2 percent coupon on investment-grade names.”

Issuers are giving investors more exposure to interest-rate risk as central bank stimulus measures suppress bond yields. The average yield on corporate bonds worldwide fell 28 basis points this year to 3.38 percent from a peak of 9 percent in October 2008, according to Bank of America Merrill Lynch’s Global Corporate & High Yield Index.

The average maturity of notes issued by DZ Bank climbed to 7.2 years in 2014 from 6.1 last year and 4.8 in 2011, data compiled by Bloomberg show. The lender offered a 2.84 percent coupon for a fixed-rate security maturing in 10 years compared with 1.93 percent for a five-year note.