ABN AMRO is expected to launch this week the first credit-linked note using the weightings of the iBoxx index, a European fixed income index jointly complied by seven market makers. The CLN is referenced to a portfolio of the index's 50 largest corporates by outstanding debt, according to officials familiar with the note. Officials at ABN declined comment.
The underling portfolio of the note, dubbed iBoxx 50 Series-I Note, is static, meaning it will not follow the index over the long term as the iBoxx's weightings and components change. However, ABN will launch a new version every six months with a re-balanced portfolio. If clients want to minimize their tracking error to the index they will have to buy the new note and sell the old note every six months. Officials said it was too expensive to launch a note that constantly rebalanced because of the amount of hedging involved.
One banker said the note was a step toward establishing index products and that if it worked, future issues could be exchange-traded. A banker at another rival firm said they are looking at developing a similar note but would be likely to base a product on the entire universe of corporate names in the index.
The firm will issue both a fixed-rate and floating-rate CLN, with the floating-rate instrument priced off three-month Euribor. The note is aimed at hedge funds, proprietary desks and insurance companies, according to officials.
