Swiss Note Buyers See No Lehman Repeat, Ditch Asset-Backed Notes
(Bloomberg) — Swiss demand for collateral-backed structured notes has plunged almost by half in two years, signaling investor confidence that a sequel to Lehman Brothers Holdings Inc.’s bankruptcy isn’t expected.
The number of such notes offered on the SIX Structured Products exchange has dropped to 1,336, down from more than 2,500 in the first quarter of 2013, exchange data show. The amount of collateral, which issuers post to protect holders of the notes, declined from a peak of more than 3 billion Swiss francs ($3.25 billion) in May 2013 to 2.42 billion Swiss francs in November.
After Lehman’s default in 2008 caused losses among holders of its structured notes, banks began offering securities that were backed by collateral or that spread credit risk. Later, stimulus measures by central banks to encourage borrowing drove down risk levels, reassuring investors that banks weren’t in immediate danger of failing.
Tradition Securities & Futures OTC SA has even sold a few notes by Italian and Spanish issuers “that would have been impossible a few years ago,” said Pierre-Yves Breton, a structured note broker at the Paris-based company. He said demand for secured products has fallen as markets have risen and clients are more comfortable with issuer risk.
Liquidated Collateral
Buyers of the Swiss notes, which are secured by cash or securities, receive the liquidated collateral if the issuer defaults. The products shield investors “against any loss in the value of their investment” in such an event, according to the exchange. Seven banks issue notes under the program, which was set up in 2009, including Credit Suisse Group AG and Bank of America Corp.
The hunt for yield may be one reason investors are staying away, said Georg von Wattenwyl, head of global financial products advisory and distribution at Bank Vontobel AG in Zurich.
“In this interest-rate environment, costs have a bigger influence than before,” he said. “The higher security of the collateralized notes means higher costs, which translates to a lower yield.”
Von Wattenwyl added that demand is higher for a service where the Swiss bank arranges for another company’s bonds to back its notes. The twist is that the new bonds are often riskier than Vontobel’s A3-rated debt, ensuring fatter returns.
Buyers can even choose the debt of Petroleo Brasileiro SA, the state-owned oil company that’s flirting with default after Aurelius Capital Management LP accused it of failing to properly report third-quarter earnings. Petrobras’s 10-year notes were yielding 7.7 percent on Feb. 3.
Increased Demand
Societe Generale SA also offers notes that allow buyers to swap out its credit risk for that of a lower-grade company to increase returns. The same unit that issues the securities sells its collateralized notes and has seen increased demand, said Murray Parker, a spokesman for the bank in London.
In 2013, a year after the European banking crisis sent its default swaps to a record high, Societe Generale SA announced that it would be moving more than half of its note sales to a unit that could issue collateralized securities. Five-year default swaps on the bank have dropped from a high of 378.1 basis points in 2012 to 88.5 today.
A survey of 700 financial advisers published by Exceed Investments in June found issuer risk to be only the seventh most frequently given answer to why the advisers didn’t offer structured products to their clients. The leading reasons were complexity and illiquidity.
To contact the reporter on this story: Yakob Peterseil in London at ypeterseil@bloomberg.net To contact the editors responsible for this story: Richard Bedard at rbedard2@bloomberg.net Charles W. Stevens
