UBS Warburg is looking at structuring a capital guaranteed product comprising of credit derivatives to sell to retail investors in the U.K. Although the plan is in its infancy and details are scarce, officials at the firm said it hopes to use single-name default swaps to leverage a fixed-income portfolio and generate higher returns than are currently possible in the equity or bond markets. Warburg officials said such a product has not been sold before to U.K. retail investors, who are historically more conservative then their counterparts on the continent. Pros at rival firms were not aware of any similar products.
The product is likely to be based on a static basket of around 20 investment-grade default swaps on names that retail investors are familiar with, such as retailers Gap and Toys "R" Us, according to an official.
"We're trying to see if an equity-type product can be structured with credit," said one credit professional. The firm aims to produce returns of around 7-10% per year, for roughly five years. He continued that investing in a basket of investment-grade credit default swaps would be more stable than equities. "People are taking equity risk, which is the biggest an investor can take and we think we should be having a look at debt because there is potentially as much upside in leveraged credit," he said. Specifically, he referred to Marconi, which continues to pay bondholders despite its shares having plummeted.