Inter-American Development Bank is preparing to launch an up to TWD13 billion (USD300 million) weather-linked bond in Taiwan, which is widely believed to be the first such deal in Asia and perhaps only the second in the world. ABN AMRO is structuring the deal, which is expected to close in the next few weeks. "This is a...unique structure," said a derivatives marketer at a rival European house. The coupons are linked to the performance of a dizzying array of global weather risks, ranging from snow depth at Fukushima, Japan, to the number of freezing days at Schiphol in the Netherlands, according to an indicative term sheet obtained by DW.
ABN AMRO Clearing and Management Services, Inc. is the weather index portfolio manager and Entergy-Koch Trading (EKT) is the advisor. Alex Schippers, global head of weather and insurance at ABN in the Netherlands, declined comment. Daniel Drosdoss, spokesman at the IADB in Washington, was unable to provide comment by press time. Officials at EKT declined comment.
The issue will be split into three tranches and offer a guaranteed coupon in the first year. The coupon on the five-year tranche is 2.5%, 3.5% for the seven year, and 4% for the 10-year, according to an official at Taiwanese securities house Barits International Securities, which is participating in the underwriting. After the first year the coupons are linked to the weather index and may fluctuate, but the principal is guaranteed by the IADB.
The high guaranteed coupon in the first year, together with the principal protection, is likely to entice yield-hungry Taiwanese investors despite the deal's complexity, said the Barits International official. "There's a lot of pressure on fund managers to perform," he continued, noting that yields on seven-year domestic corporate debt average 1.76%.
Indeed, ABN has upped the size to TWD13 billion from TWD10 billion and added the five and seven-year tranches in recent weeks in response to demand.
The underlying portfolio consists of 24 derivatives positions across nine countries, including a short call on temperature and sunshine in Melbourne, a short collar on true average temperature in Osaka, Japan, and a short put on the two coldest days in Essen, Germany, according to the indicative term sheet. EKT is believed to be the originator of the portfolio and is reportedly looking to lay off risk in the deal.
The deal's attractive yield and non-correlated risk, however, have not convinced everyone it will be a sure-fire hit. Domestic shop Capital Securities recently pulled out of a proposed distribution deal with ABN because of concerns over transparency and a potential lack of appetite for such an exotic instrument, according to a marketer at the firm.
For an indicative term sheet of an earlier version of the deal, please visit DW's Web site (www.derivativesweek.com).
