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Capital Markets

Extendible notes: X-notes soldier on

Despite widespread investor puts of pre-crunch extendible notes, the sector is experiencing a relatively good 2008, with investors calling the shots.

Michael Nelskylä, RBS

"The risk area has moved from triple-B to single-A, causing a flight to double-A names. Double-A now pays as much as a single-A did eight months ago, so it’s just a case of maintaining similar investments"

Michael Nelskylä, RBS

When the credit crunch hit in August, one consequence that passed relatively unnoticed was that holders of extendible notes decided in large numbers that they did not want to extend their investment any further. They began putting the notes. But despite investors having put nearly $250 billion of extendible notes since the summer, the market has been very active so far this year. "In the current environment there is a tendency towards putting notes," says Michael Nelskylä, European head of structured investor products at RBS. "There is now a significant amount of uncertainty in this space." That uncertainty is a result of investors viewing X-notes as short-term securities that can be extended, while many issuers have seen X-notes as having a more medium-term character. Before the crunch, this created a win-win situation where investors could hold a note that paid out higher yields (with each annual step-up) than regular short-term investments, while issuers could fund in the medium term at relatively cheap prices.

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