The power reverse dual currency- linked note (PRDC) has become the true champion of the structured market. Its popularity throughout last year has kept the shrinking private structured market from falling into a state of paralysis. According to MTNWare, euro -denominated structured trades fell by 25% in 2000 on the previous year. But a buoyant Tokyo market has pushed issuance in structured yen trades up by a third in the last 12 months, with power reverse dual currency-linked notes leading the way. And the popularity of the PRDC looks set to continue. Statistics from one of the top Japanese houses shows that of all the structured trades it handled in 1998, 30% was made up of callable PRDCs. But with Japanese investors chasing more attractive returns this figure grew to an impressive 60% in 2000. As Peter Jackson, head of Euro-MTNs at Salomon Smith Barney said when reviewing last year: "Many Japanese investors have liabilities with a need for more than a 2% or 3% interest rate. It's not a very sophisticated credit market so they look for products like the power reverse dual." But the PRDC is not a new phenomenon. Michael Robertson, head of primary debt at Mizuho International, outlines its history. He says: "The power reverse dual has been a popular structure for some years. The dual reverse currency note came first in the early 90s, but with a falling stock market and a stagnant economy, and the subsequent low yen-yields, Japanese investors sought higher-yielding assets. And so we have seen a movement through the second half of the 90s into the power reverse dual structure." Even though the structure is familiar to most issuers, Robertson believes it is not feasible for all. He says: "Although it is now a fairly commoditised structure, it is still more suited to the more sophisticated high-grade issuers, for example continental European and Scandinavian government-related issuers and agencies, and the supranationals. Borrowers need to have the resources to price these instruments." African Development Bank is one such borrower that fits the mould for this type of structure. Since the beginning of 2001, all of its five issues have been long-dated ¥500 million ($4.25 million) notes. Although the bank refuses to comment on the details of its private placements, the bank's triple-A rating from Moody's makes it an ideal vehicle for the risk-weighted PRDC. Richard Proudlove, Euro-MTNs at Salomon Smith Barney, explains this concept. He says: "If you are taking that risk within the structure of the bond you do not want to add on top of that any credit risk." The driver behind the power reverse dual is the investor's view on interest rate levels and the shape of the yield curve. For the PRDC and the reverse dual currency note it is the FX rate levels and the amount of yield pick up between dollar and yen rates that is vital for Japanese investors. And it is this structure risk that explains the large percentage of yen notes issued through higher-rated entities. Last year almost 60% of private yen placements were issued by triple- and double-As. Nordic Investment Bank is no exception. The triple-A borrower issued 22 yen trades off its euro10 billion ($9.22 billion) debt issuance programme in 2000. Samu Slotte, senior funding officer at Nordic Investment Bank, admits that the PRDC offers attractive funding for the bank but he is not totally convinced by them. He says: "Even though most of the transactions are small they provide attractive levels. But they create a lot of work for the amount of funding they give. At the same time, they create a lot of uncertainty about the final maturity of the transactions. This is because most of these transactions are callable and, as we sell the same options to our swap counterparty, we do not know for certain how long we have the funding." Westland/Utrecht Hypotheekbank, the slightly lower-rated Aa2 Dutch borrower has issued 12 yen notes this year and all of them have had a maturity of more than six years. Rene Genet, senior dealer at WestlandUtrecht, says: "The longer maturity adds value to the investor but the notes are callable and about 80% of all our callable trades are called at their first call date." But the bank does not rely on these trades. Genet says: "With the power reverse dual it seems that we either do a lot or none at all. As an estimate I would say that only 25% of our structured enquiry comes in the form of the power reverse dual. But for us it an easy structure and we have the operational skills to handle the complexity of it." Genet's view is not shared by all and Maria Vilmne, senior funding officer at Kommuninvest, has no complaints. She says: "We have seen a steady flow of this type of structure throughout the autumn and winter. Of all the structured enquiry we see coming out of Japan, about 75% of this is made up of power reverse dual currency notes." Though there is a general reluctance to talk about the future of this structure within the MTN market, Genet at Westland/Utrecht does give his prediction on the structured note. He says: "I think we will continue to see this structure once in a while. Whenever Japanese investors take a view on interest rates this structure will continue to pop up."
January 26, 2001
