HSBC plans to follow Citibank and Deutsche Bank's lead and issue callable bonds. Ian Banks, treasurer at HSBC in Seoul, said the firm plans to issue the bonds in the coming months. He described this as a logical step after the announcement that the Korea Futures Exchange is going to launch options on Korean Treasury bond futures in May (DW, 2/24). The listed options will be used to hedge over-the-counter derivatives used to structure the bonds.
"[The callable bond] market is just starting to bloom," said an official at Citibank. He noted that callable bonds, which contain an embedded swaption, offer greater returns than traditional bonds. An official at Deutsche Bank in Seoul said since the market started last month, approximately KRW500 billion (USD384 million) in callable bonds have been issued, each ranging between KRW50-100 billion in size. "By the end of the year this market could be five times as large," he noted.
"Bonds with call and put structures offer a lot of value to investors and banks," said Banks. In a typical example in Korea, a corporate will issue a six-year bond with an embedded interest-rate swaption that allows the issuer the right to call the swap after a predetermined period. The issuing corporate sells the right to call the swap to the bank in return for a payment. There is also a call that allows the issuer to call back the bond if the swaption is triggered. The corporate benefits by issuing at a below market rate.
