BNP Paribas is marketing a variation on the popular target redemption note, commonly referred to as TARNs (DW, 7/28/03), with redemption triggered by specified rates spreads. One market official reported Goldman Sachs had priced a similar deal in the last month and other shops are said to be looking at structuring these instruments. Typical TARNs are leveraged punts on rates spreads, which mature early if the total annual coupons paid to investors reach a certain level, usually around 15% of capital invested. The notes appeal to investors because they pay out a high fixed coupon in the first year, often around 10%, with subsequent coupons linked to the spread between interest rates, for example two-year and 10-year constant maturity swap rates.
Kara Sportelli, structurer at BNP Paribas in London, explained this latest twist, dubbed Presto at BNP, retains the early redemption possibility, but has the advantage its that its tenor is more closely linked to investors' views on rates. In an example structure, an investor who believes the spread between 10-year and two-year CMS rates will be wider than the forward curve is predicting would receive 6% for the first two years and in subsequent years would receive a coupon worth four times the spread between 10-year and two-year CMS. The early redemption is triggered if the spread is wider than 100 basis points at any coupon date after the first two years. "This appeals to clients who want to have more clarity about when their product will be redeemed," said Sportelli.
