Structurers in the U.S. are noting a pickup in demand for option-linked credit investment structures such as range accruals since the spike in credit volatility two weeks ago. The notes appeal to investors who think credit spreads are starting to stabilize and will settle within a range.
Credit range accruals feature upper and lower limits and payout based on the length of time spreads for a credit index remain within a preset range. The notes have been seen in Europe for some time, but are now being offered by a handful of firms in New York, typically linked to credit indices.
Oliver Dunsche, head of credit derivative structuring at Barclays Capital in New York, said, "I think with the recent widening and uptick in volatility, options-based products including credit spread range accruals look attractive." The ability to take spread views embedded in notes and with ratings should appeal to traditional funded investors, he added.
A Merrill Lynch official said the firm has also started to issue similar notes linked to single-name spreads rather than indices. Commercial banks have been driving the interest, he added. U.S. investors have--up to now--held back from buying range accrual notes because they have taken time to understand spread-based credit structures. The delay in uptake is also in part because rating agencies have only released guidance on some types of spread-based investments such as leveraged super senior notes.
