Interest rate structurers at BNP Paribas and Deutsche Bank in London are marketing a variation on the popular target redemption note, or TARN, to institutional investors in the euro-zone. The latest structure, named TASC by BNP Paribas, is a target note with a switched coupon.
The original TARN note, created by Deutsche Bank last year (DW, 7/28), is a leveraged bet on the spread between 10-year constant maturity swap rates and two-year CMS. The TARN offers a fixed payout up to a maximum level agreed with the investor, assuming the investor bets correctly on the direction of swap spreads. This structure, however, expires once the pre-determined maximum return has been paid, which could leave investors with re-investment risk. Conversely, the TASC switches to pay investors 100% of the coupon of a 10-year CMS note in the event of early redemption, explained Patrik Sandin, head of interest rates structuring at BNP Paribas in London. The TASC structure appeals to the investors that are wary of the TARN note because of the uncertain maturity.
The next evolution of the product will likely be to look at other pay-outs the structure could switch to, apart from the 10-year CMS, noted Sandin. BNP Paribas is working on several alternatives, he added, declining to elaborate on this point. A market official confirmed Deutsche Bank had traded a similar switching product in the last six weeks.