Search results for

When Glas Cymru approached the sterling market to raise finance for its Welsh Water acquisition, it became clear that its innovative deal could offer rare security to water sector investors more accustomed to shouldering event risk. For the 90 or more institutions that took part, it was an irresistible opportunity, despite the complex 12 tranche structure. With £1.9bn raised, Glas Cymru's work is done for now, but observers are already asking themselves: will the structure catch on to transform the sector?

As those who recall activities of the heroic "architects of value" from Bankers Trust will testify, from a European perspective the UK was where it all began. As recently as 1997, UK borrowers still accounted for 40% of the high yield market in European currencies. By the middle of 2001, their share had been whittled down to 23%.

Despite a pro-euro Labour government returning to power in early June, the outlook for sterling has rarely been brighter. 2001 has seen the total volume of outstanding sterling denominated non-gilt bonds outstrip the government market - an incredible advance within a relatively short space of time for a market that, according to most investors not so long ago, would become more or less sidelined by the new euro market

"What we are hearing from institutions in the UK is that they are increasingly looking for liquidity," says Bob Curry, director, global debt at Dresdner Kleinwort Wasserstein in London. "Issuers looking to raise, say, £100m might well be penalised in terms of pricing unless it is a tap issue or an investor driven private placement. Investors generally see £200m as the minimum size for liquid issues these days, and issue sizes of £300m or £350m are now being achieved by a range of companies rather than just household names, which is great as far as the sterling market is concerned."

Aside from the expansion in issuance of fixed rate corporate paper this year, an important segment of the sterling sector which is also growing rapidly is the market for retail price inflation (RPI) and limited price inflation (LPI) linked bonds, although the market remains small relative to the index linked government bond sector. "As there is still no more than about £4bn or £5bn of index linked corporate bonds outstanding this means that pension funds are still allocating most of their funds on the index linked side to gilts, whereas on the fixed rate side they have a much larger allocation of corporate bonds," explains Paul Stanworth, an institutional investor strategist at the Royal Bank of Scoland. "People have been surprised by how much demand there has been for index linked corporate debt but against the background of FRS17 is it not difficult to see why demand has been so strong."

Sponsored by

Canadian Export Development Corp., a government-owned agency with more than CAD20 billion (USD12.8 billion) in assets, plans to sell reverse dual currency structured notes for the first time as a way to capitalize on the broadening market in Japan for structured products. The agency plans to sell the products to raise capital, according to Chad Buffel, portfolio manager in Ottawa.

Swiss alternative investment consultant Noble Investments is considering opening offices in Asia to exploit the relatively untapped alternative investment markets in that region. The consultant and alternative investment structurer liases with fund managers and investors to offer bespoke products, such as guaranteed products, which are often structured using over-the-counter derivatives, according to Patrick Aregger, partner in Zurich. The timing will depend on the growth of the alternative investment arena. Mauro Gerli, partner in Zurich, said, "If a pension fund calls tomorrow we will start tomorrow." Aregger added, "we will grab opportunities." Both declined to put a timeframe to the plans.

Dresdner Kleinwort Wasserstein has set up a replicable index of hedge funds, which it will also use as a reference for derivative products. Mehraj Mattoo, co-head of alternative investments in London, said the index consists of over 100 managers. Investors can hand pick 30-40 funds as the basis for structured products, such as principal protected funds, total-return swaps and options. David Besancon, co-head of alternative investments in London, said, "if you can't replicate [the index] you can give a wrong image of performance. You can crunch numbers but if you can't invest it is not meaningful." He added the index is diverse in terms of location and style.

Credit default-swap spreads on Asian names, such as Hong Kong-based conglomerate Hutchison Whampoa, widened last week on continuing investor concerns that Hong Kong would sink into a recession. "Hutchison moved out big time," said Bill Xie, credit derivatives trader at BNP Paribas in Hong Kong. Emmanuel Dianflon, Asian head of credit derivatives at BNP Paribas in Hong Kong, added that two-year protection on Hong Kong's Hutchison Whampoa widened to 160-180 basis points Thursday from 115-130bps in the last two weeks. Xie added that while demand for protection has remained strong, caution has pushed offers higher.

HDFC Mutual Fund in Mumbai is waiting for liquidity to improve before it makes its first use of over-the-counter equity options. A fund manager at the firm said it has received board approval and will look to purchase and sell over-the-counter options as a hedging instrument for its INR2.5 billion (USD52 million) equity portfolio within a year. He continued that the firm will start with futures and exchange-traded options within six months. "We're aware of how equity derivatives work. The point is its difficult to implement strategies in a market with poor liquidity," the manager said. One of the strategies HDFC will use is writing covered puts. The fund manager explained that this generates premium for the fund and does not put the fund at risk, since it is long the underlying stock.

Man Investment Products plans to hire a derivatives savvy product engineer to develop investment products in the wake of increasing demand. David Browne, head of funding in London, said an increase in demand for guaranteed products and alternative investment products is largely responsible for its assets under-management increasing to USD8 billion from USD6.7 billion at year-end. Man structures guaranteed products in several ways including frequently using over-the-counter equity options and zero-coupon bonds, according to Browne.