| At a glance: Investor: Bice Vida Structurer: Deutsche Bank Deal type: Synthetic leveraged inflation assets Date: June 30, 2005 |
It’s difficult enough for pension funds and insurance companies in the UK or US to find actuarially acceptable yield, but for their counterparts in more closed economies such as Chile it’s much harder.
Chilean insurance company Bice Vida found itself in such a predicament in 2005. Its liabilities are denominated in UF (unidad de fomento), inflation-indexed Chilean pesos. But demand for long-dated, high-yielding, UF-denominated fixed-income investments is enormous – Chilean insurance companies control some $16 billion – and vastly exceeds supply.
Institutional investors such as Bice Vida are allowed to buy the debt of foreign companies such as Mexico’s wireless telecommunications company Telmex. But Telmex, which is able to borrow at razor-thin spreads in dollars, Mexican pesos and from domestic banks, has no interest in issuing in Chile.
What’s more, those razor-thin spreads themselves make Telmex debt unattractive to such companies as Bice Vida. To get the yield they wanted, Bice Vida would have to leverage their investment by going to the repo market and borrowing Telmex bonds to augment their initial investment.