Issuer: Snap
Amount: $1 billion
Arranger: ING Barings
Launched: August 24 1994
Issuer: Ribs
Amount: $5 billion
Launched: March 27 1997
Arranger: Deutsche Morgan Grenfell
Back from a few days wandering the medina in Marrakech, you are inspired to take a punt on Moroccan securities. Scouring the Euromarkets, you can't find a product that fits your investment criteria, and you haven't got the first idea how to access Morocco's domestic market. What option do you have, apart from placing a bulk order for Moroccan carpets?
An increasingly attractive solution for investors is buying an MTN issue from a programme set up to repackage securities. Since the start of 1996, 37 such programmes have been launched and more than $20 billion worth of paper issued, mostly by special purpose vehicles arranged and managed by investment banks.
Two banks making strides in this market are ING Barings and Deutsche Morgan Grenfell. Guy Thomas, assistant director at ING Barings, sums up the market's appeal: "We give investors what they want, in a form they are comfortable with."
ING was one of the trailblazers in this market, launching a $1 billion programme for its Snap vehicle in June 1994 - the name is an acronym for structured note asset packaging. The primary goal of the programme is to provide investors with exposure to emerging market debt which they would otherwise find difficult to access.
Prior to Snap, repackaging programmes had generally provided exposure to a pool of underlying assets. An investor wanting exposure to Moroccan debt would therefore have to take on a cocktail of other emerging market risks.
Snap was one of the first vehicles to have a trust structure allowing it to ringfence underlying assets into separate new issues. "There is no risk of other securities polluting the issue," says Thomas. This gives the programme added flexibility, and investors the exact risk profile they seek.
Snap has already provided a solution for the dilemma over Moroccan debt. Last November, ING offered a Dm200 million ($115.6 million) note, with a coupon of 11.5% linked to yields on Moroccan floating-rate dollar loans. "The deal was an absolute blow-out," says Thomas. The size of the issue was twice increased, and has been actively traded in the secondary market, yielding 410 basis points over Bunds.
The deal offers an insight into how a repackaging vehicle can turn an unattractive product into a note that investors want to buy. The Moroccan loans were issued in US dollars at a considerable discount and were not cleared through Euroclear or listed.
The Moroccan-linked note that Snap ultimately offered investors was denominated in Deutschmarks, offered a hefty coupon (rather than capital appreciation), was cleared through Euroclear and listed on the London Stock Exchange.
"It is essentially a very simple structure, passing all the risks of the underlying asset on to the investor, but in a more palatable form," says Thomas. Snap purchases the underlying securities, which are held in trust by Chase. It then enters into a basis swap with ING Barings, exchanging the cash flows on the loans for the cash flows needed to match payments on the bonds.
For investors the risk profile is effectively the same as buying the underlying securities outright, the only difference being the inclusion of swap counterparty risk. Given that ING Barings has a counterparty rating of AA minus this is not a significant concern, especially considering the credit of the underlying investment. As Thomas points out: "The investor shouldn't be concerned about risks in Snap, but look solely to the underlying security for credit risk."
While ING has concentrated on offering investors access to emerging market debt, Deutsche Morgan Grenfell (DMG) has used the same basic repackaging structure to offer investors MTNs at the top end of the credit spectrum.
In March the bank set up a $5 billion MTN programme for Ribs, a special-purpose vehicle based in the Netherlands. The programme has already issued more than $1 billion worth of triple-A rated notes, using European Union government bonds as the underlying securities. Through repackaging these sovereign bonds DMG has been able to offer investors a yield above Libor, at a time when spreads on sovereign, or triple-A rated names, have been exceptionally tight.
Compared with ING Barings, the bank is a relative newcomer in the repackaging market. With the major restructuring of its fixed-income operations, it wanted to wait until it had the necessary expertise on the desk before committing to the market. That expertise arrived last October in the form of Stephen Stonberg, recruited from Merrill Lynch.
The repackaged securities operation is now an integral part of the structured debt and private placements group, the umbrella that covers the standard MTN business, as well as tax-driven structures and credit derivatives. Says Tiina Lee, director and head of EMTNS: "The reason these businesses are together is to improve our product delivery to clients. The sales force knows they can come to one desk for the whole range of products."
According to Peter Wakefield, director of structured debt and private placements at the bank, the spectacular success of Ribs has been "quite an education for those who didn't believe that there was that much money in the market". Issues in Deutschmarks and Swiss and French francs were all increased after launch, and from the first four public issues (the other being in sterling), the bank has seen only Sfr5 million flow back.
The success of these issues was due to a number of different factors converging. The underlying government bonds were trading wide enough to Libor to make the swaps into the currencies of issuance attractive. This was partly a function of the basis swap market in general, but also a result of the positioning of DMG's own swap book. If it had been positioned differently the trades might not have made sense. Even then, although DMG knew there was demand for this type of issue, it had no idea how much.
"It was an eye-opener," admits Lee. "Looking at the investor base the distribution has been stunningly good, involving the top-tier buyers across continental Europe."