Though existing fixed income investors will have benefitted from persistent credit spread tightening, new entrants found the new levels—which reached post-crisis lows in some cases—insufficiently attractive to invest new money without offsetting features. After a record year for credit-linked notes (CLN) in 2016, new market conditions have altered structured product flows in the asset class.
“Unlike 2016, the tightening of credit spreads this year set a difficult backdrop for CLN flows,” Patricia Lau, head of cross asset derivatives sales for Hong Kong retail and Asia Pacific ex-Japan private bank coverage, Credit Suisse. “In view of this, we changed our direction to focus on bond repackaged notes, which enable investors to alter parts of the profiles of the underlying bonds to meet their objectives, for example, by shifting coupon payments from fixed to floating or switching the cash flows into other currencies.”
On top of bond repacks for improving the profile of coupon payments, Credit Suisse was also able to creatively enhance yield via an additional overlay of FX, equities, rates or CDS. In addition, the bank’s manufacturing firepower and its astute understanding of client needs were on display, this time through the utilisation of special purpose vehicles (SPVs).
“Most of our bond repackaged notes are traded through SPVs so that investors can benefit from bankruptcy remoteness and reduced issuer risk,” Pat explains. “SPV transactions also appeal to banks as a means to alleviate pressure on balance sheet due to regulations.”
Lau hopes to encourage wider adoption of SPVs and Credit Suisse is making a committed drive to educate clients about onboarding or operational processes involved with such structures.
Despite moderated flows, Credit Suisse’s ability to tap into the demand for shifting coupon payments on existing fixed income holdings, alongside other peripheral but crucial strengths, including the ability to add a wide range of overlays and produce vehicles to insulate balance sheet risk. These strengths have led the private banking industry to choose the Credit Suisse as this year’s Best Provider of Credit-linked Structured Products.