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Derivatives

Hong Kong Conglomerate Buys Structured Note

CITIC Pacific, a Hong Kong-based conglomerate with business lines including aviation, telecommunications and property, recently purchased a structured interest rate note to boost yield for its asset portfolio. The note offers leveraged exposure to market risk without taking on additional credit risk. "It's a straight forward structure--with bonds you have both market risk and credit risk," said Betty Chuk, senior officer in the treasury department.

CITIC recently bought a five-year USD30 million inverse floater, in which the company receives a guaranteed coupon of 7.5% for the first year, according to Chuk. Additionally, if six-month U.S. LIBOR remains below 3.6% for 18 months, CITIC receives an additional 0.5% and the structure is knocked out and the initial principal amount is returned. However, if the target LIBOR rate rises above 3.6% then the company receives no additional payout and is locked in until the note matures. "We have no negative payouts, the worst scenario is we receive no cash flows in years two through five," said Chuk, noting that CITIC expects interest rates to remain low.

In addition to structured notes, the conglomerate also uses interest rate swaps and foreign exchange options to hedge its liabilities. HSBC was the counterparty for this structured note. "They're very innovative," said Chuk.

 

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