International houses in Seoul, including BNP Paribas, JPMorgan and Standard Chartered Bank, have piled into the evolving exotic bond market in Korea, structuring range accrual notes for the first time, according to market officials. The notes, such as callable bonds, reduce funding costs for corporates and offer structures appealing to yield-hungry investors (DW, 4/28). Market officials noted that Korean investors have become interested in the structured products in recent months due to prevailing low interest rates.
Deutsche Bank and Citibank were among the first to structure the notes (DW, 5/19), but since their successful introduction several banks have followed. "Everyone's looking to do this," noted one interest-rate trader, adding that bidding for business is becoming quite competitive. Several traders singled out BNP, Citibank and Deutsche Bank as being the most active. Officials at the banks declined comment.
A typical range accrual note would be a three-year KRW50 billion (USD40 million) note paying a coupon referenced to the three-month certificate of deposit (C.D.) rate. If the C.D. rate is less than or equal to 6.75%, the coupon is set at 7.65%. If the rate hikes above 6.75%, the coupon is reduced to 2.5%. On the back of the issue, the corporate will enter a range accrual swap to hedge its exposure.
