European structured credit derivatives professionals at Merrill Lynch, ABN AMRO, UBS Warburg and Citigroup plan to market their wares to retail investors for the first time. "Within 12 months, this will be a big market," according to Stefan Armbruster, head of equity structured products for Germany and Austria at ABN AMRO in Frankfurt. Retail investors have traditionally bought structured equity products, but with the equity markets tanking for three straight years, firms are starting to pitch products that offer investors high coupon payments and are turning to credit derivatives.
John McLaughlin, head of the structured investment team at Schroder Investment Management in London, said he has been approached by numerous firms in Europe that would like to distribute these products to the retail market, although he declined to name the institutions. "These types of products are just beginning to hit the markets," he added.
ABN AMRO has just started structuring these types of products for high-net-worth clients and wants to extend the effort to retail clients, according to Armbruster. Merrill Lynch is marketing certain principal-protected credit-linked transactions to what it deems as suitable private banking clients, said Tony Main, v.p. in the global credit derivatives group at Merrill in London, declining to comment on Merrill's plans for retail investors.
Schroder marketed its first transaction with a credit component to retail investors last month, but decided to offer the product in Asia rather than Europe because that is where it has the strongest presence. McLaughlin said Schroder has no immediate plans to market these transactions in Europe, but will do so if it sees demand.
Derivatives houses will likely start by offering capital protected products, bankers said. These can be structured a variety of ways, but a common way is to purchase zero-coupon bonds and use the remaining capital to purchase a series of first-to-default baskets. The baskets will provide the coupon payment for investors. If there is a default, the coupon payment steps down. Spokeswomen at UBS and Citigroup declined comment.
