ANZ is preparing to structure credit-linked notes in the coming months based on its recently launched series of Australian credit indices. "Although there are tight spreads globally, Australian credits are compelling as they offer good value," explained Kate Birchall, head of fixed income research at ANZ in Sydney. Birchall continued that Australian credit quality continues to strengthen, as reflected in the rising domestic equity market.
The Aussie bank recently launched a series of 16 credit indices based on domestic names. The indices employ a methodology that links equity share value with inferred asset volatility, versus total liabilities to determine a company's credit quality and likely ability to withstand default.
A unique aspect of the indices is that they factor in equity volatility, which is generally lower in Australia than other developed markets, noted Birchall. "Other models have a one-size-fits-all approach to volatility," she noted, explaining that fixed income investors prefer low equity volatility, which infers greater certainty in a credit.
The flagship index, dubbed the Crystal Credit Quality Index, tracks roughly 80-90 credits, based on their probable distance-to-default, which shows that Aussie credits are moving farther away from the probability of default in recent years.
Also in the works are indexes for Japan and Asia using the same methodology later this year, noted Birchall. She declined to elaborate on this point.
