Global Banks Turn to Not-So-Fixed Income Via Debt Platform

  • Citigroup and JPMorgan among lenders launching repack platform
  • Banks forecast annual sales of $2 billion in Europe, Asia

Fixed income looks set to be increasingly not-so-fixed. 

BNP Paribas SA, Citigroup Inc., Credit Suisse Group AG and JPMorgan Chase & Co. are teaming up to create a centralized platform that allows investors to change some features of bonds into almost anything they like.

The service, launching early next year, will offer repackaged notes known as repacks that will be issued through a special purpose vehicle, according to interviews with the banks involved. The structured securities allow buyers to alter parts of the profiles of underlying bonds, such as turn coupon payments into floating from fixed or switch returns into other currencies.

Low interest rates and tight credit spreads have boosted demand for tailored debt offerings as investors seek more innovative ways of chasing yield. Most buyers currently have to approach banks for pricing and review lengthy legal documents individually. Stricter global banking regulations means it’s more beneficial to standardize simpler products and trade them via a single entity from one location, according to Credit Suisse Group AG.

“Structured product issuance has become more onerous for banks as a result of their balance sheet and funding constraints and as such less attractive to investors,” said Paul Bajer, director in global credit products at Credit Suisse in London. “Regulations, both local and global, have also impacted investors, for example, requiring them to demonstrate best execution. This is easier to achieve when all banks quote on the same terms via a single platform.”

Europe, Asia

The lenders will initially introduce the platform in Europe, where most requests for the service are coming from, as well as Asia, where the repack market is significant, said Paul Smith, head of rates solutions structuring at Citigroup. Annual sales could be as much as $2 billion, the banks estimate.

Global investment banks collaborating on a “one-stop-shop” multi-dealer platform isn’t entirely new. In January this year, JPMorgan, BNP Paribas, Goldman Sachs Group Inc., Barclays Plc, HSBC Holdings Plc and Societe Generale SA teamed up on an equity-linked structured products platform targeting private banks and wealth management firms in Asia.

The ability to issue standardized products from the same special purpose vehicle is a key attraction of the repack platform, according to Alistair Bloch, executive director in global credit markets & syndicate at JPMorgan in London. In the event of a default, there is a potential for the participating banks to step in as new counterparties and avoid terminating the security.

Best Pricing

“One of the big issues for investors is that when they ask different counterparties for a price on the same product, they never know if it’s really the same product,” said Enrico Ballarini, director in solutions structuring at BNP Paribas. “Here, the investors will know for a fact that the price will be comparable. There’s much more certainty on getting the best pricing on the same terms.”

Investors such as insurance companies and asset managers are the main buyers of repacks, as they offer alternatives to buying over-the-counter derivatives that some institutions may not have the capacity to manage, said Credit Suisse’s Bajer. The notes are among the largest and fastest-growing structured product markets, Bajer said. Most deals are privately placed.

“We see this transparency as a natural evolution that will appeal to investors, and help grow the market,” said JPMorgan’s Bloch.

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