Toyota Motor Credit has started offering derivative-based investment notes to U.S. investors and last month tapped Citigroup's retail network to sell its first commodity-linked note. Instead of seeing the corporate as a competitor, dealers are looking to get in on the lucrative hedging contracts on such notes Toyota may shop. Firms are also reported to be pitching similar note programs to other high-grade corporates, such as General Electric and UPS.
The three-year Toyota notes reference the Dow Jones/AIG Commodities Index. The notes are fully capital protected and offer 75% participation in the upside of the index. "This was quite revolutionary," said one structured product official, noting while Toyota has issued fixed-income derivative notes before, commodities is a new direction and a broker network has not been borrowed in this way before.
The issue is also beneficial for Citi, in that it allows investors who have reached credit limits for exposure to Citi paper to access another credit's paper. Citi officials did not respond to messages by press time.
Steve Howard, director of capital markets in Torrance, Calif., said Toyota issued the notes because it was an attractive funding opportunity. He said the company fully swapped the USD36 million notes to a U.S. dollar interest-rate liability, declining to give details of the swap rate or disclose the counterparty. Howard noted, however, "We would prefer to execute bond deals with an entity that has strong derivatives capabilities so they can swap back." But he also added Toyota has considered bidding out the swap part of the deal.
The AAA-rated group has been expanding its funding methods from interest-rate and foreign-exchange linked notes to include equity. It may also consider a follow up to the commodity deal. "We are really enjoying ourselves now," said Howard. "We are getting to the point where we are becoming very responsive in our turnaround time; it's really bearing some nice fruits for us," he added.
Toyota's credit rating can help it carve a niche for itself in structured notes, said Howard, explaining it is not competing with the dealers and corporates with similar ratings are few and far between.
Structured equity sales officials said the development is a sign the U.S. market is maturing and investors are becoming more comfortable with structured notes. Several dealers said they are working on similar ventures with highly-rated corporates, declining to give names. Officials at UPS and GE did not respond to messages by press time.
--Elinor Comlay
