Barclays Capital is marketing fully-rated index-based notes which pay a guaranteed coupon so long as a reference index stays below a preset trigger level. Dubbed COTONs for Credit One-Touch Notes, the first-of-a-kind trade is an outgrowth of range-accrual notes, in that they allow investors to take views on index spreads, and of constant proportion debt obligations, in that they are rated on both spread risk and default risk. They are not principal protected like range accruals or levered like CPDOs.
Heikki Monkkonen, head of credit structuring in London, said the notes will appeal to traditional credit investors looking for yield enhancement.
Monkkonen said COTONs are a simpler product with shorter maturity and higher premiums than CPDOs. Five-year AAA-rated notes will pay EURIBOR plus 75 basis points so long as the five-year on-the-run iTraxx doesn't hit a trigger level. If the trigger is hit, coupons and principal are not paid. Monkkonen declined to specify the trigger level, but said it is very high in order to obtain the rating. Barclays will also offer capital structure notes with lower ratings, lower trigger levels and higher premiums, and the notes could also be structured on other indices.
Monkkonen declined comment on the hedging mechanics behind the notes.