Structured Products Europe Awards 2016
"A year and a half ago, people thought the low-rate environment in Europe would be relatively short-lived," says Julien Lascar, London-based head of sales, Europe ex-France, for cross-asset solutions at Societe Generale. It hasn't turned out that way.
For many of Europe's issuers – stymied by burdensome regulation and buffeted by market shocks such as Brexit and the election of Donald Trump – the cold, hard reality of issuing products into a moribund macro environment while offering capital protection in the face of rock-bottom swap rates no longer adds up. Many are reviewing their commitment to the business; some are already heading for the exit.
But for those with scale and staying power, the opportunities remain rich. With choppy equities markets hampering returns for vanilla products such as autocallables, investors are being forced to broaden their horizons, taking on more principal risk, extending maturities and looking to hybrid payoffs. The need for a provider capable of offering such creative solutions is more pressing than ever – and SG has stepped up to the plate.
"Since Europe is a mature market, people are happy to diversify and adapt in the search for pickup. In Italy and Belgium, for instance, we've had great success in offering dollar-denominated products to clients; in the Nordics, we've seen clients shifting back to local currency products. In France, we've seen a huge uptick in capital-at-risk products, with low barriers to maintain some downside protection. Clients are realistic about the need to adapt; it's happened a lot quicker than I expected. That should stand us in good stead for 2017," says Lascar.
Since Europe is a mature market, people are happy to diversify and adapt in the search for pickup. Clients are realistic about the need to adapt; it's happened a lot quicker than I expected. That should stand us in good stead for 2017
Julien Lascar, Societe Generale
The bank demonstrated its prowess here in one of the year's landmark deals: the issuance of two notes in Italy offering exposure to the European Investment Bank (EIB). Several strands fell carefully together here – and SG was in prime position to join them together.
Retail investors in Italy got burned at the start of the year, when subordinated bonds issued by several institutions were bailed in. That has made Italian investors wary of investing in structured notes in general this year, particularly those issued by local names. SG saw the opportunity to offer two products wrapped around EIB paper - a AAA-rated issuer that, as a supranational development bank, is not subject to a bail-in regime. Many local names sold the notes, allowing SG's distributor partners to collect fee income – but punters faced no exposure to them.
The bank was able to eke out a decent yield thanks to several innovative features: a step-up coupon rising from 1.1% to 2.5%, and an unusually long tenor, at seven years. The notes, which are callable by the issuer, were also dollar-denominated, offering a chance for a forex play – and necessitating some education for clients around currency risk. Launched in the second quarter, the notes had already raised €340 million as of September.
"We believe the trend towards third-party issuance will continue next year, and accelerate. We're working on a lot of projects that should come to fruition in the coming months. I'd expect to see more issuance from sovereigns, supranationals and agencies, as well as corporates with a good brand recognition. There are parallels to the work we did on Formosa bonds in Taiwan; they started off as an institutional-only product, but now regulators have opened up the way for retail investors to benefit from it," says Lascar.
Marc Saffon, global head of engineering for SG's global markets business, sees the twin pressures of costly regulation – most obviously the European Union's forthcoming Packaged Retail and Insurance-based Investment Products (Priips) regulation – and continuing low volumes in many regions and product lines leading to a bifurcation of the market, with only a few full-service, pan-European houses remaining.
"The competitive landscape is changing rapidly. I think we'll see a tiering of structured products providers going forward; there will be only be a handful of global players left. To do this business properly, you need scale, a big compliance budget, and the requisite level of risk appetite. But we'll also see a second tier of domestic players maintain share in their own markets. A few of those guys will become white-label clients, and either distribute and repackage others' products, or simply be a channel for the bigger houses – and take care of the burden of local market compliance," he says.
We'll see a tiering of structured products providers going forward; there will be only be a handful of global players left. To do this business properly, you need scale, a big compliance budget, and the requisite level of risk appetite
Marc Saffon, Societe Generale
It is telling that so many of SG's top brass in equities – including the likes of Lascar and Saffon, as well as head of global markets Frank Drouet – cut their teeth in Asia. Here, key markets such as Japan have been living with the distortive effects of low rates and extraordinary monetary policy for decades. Lascar points to lessons from operating in such an environment that the bank has drawn on for its European retail business: namely, that it is possible to offer a decent return from structured products when rates are at rock bottom. Issuers just need to be smart in the way they go about it.
In another typical deal this year that combined traditional underlyings with a less familiar currency to offer investors some additional pickup, in the second quarter SG partnered with several Belgian distributors to offer exposure to two popular funds through notes denominated in Norwegian krone – in part, a bet on the currency appreciating as oil prices recovered. Clients liked the pitch, and as of September, the notes had already raised Nkr750 million ($89 million).
It helps that SG has a longer pedigree than most in cross-asset structuring. It first merged its equities and fixed income, currencies and commodities (Ficc) sales teams several years ago – a move that was tough at the time, Lascar recalls, but one that has borne increasingly rich fruit during the difficult years that have followed the eurozone crisis, with clients increasingly looking to hybrid rather than equity-only solutions.
It also stops the bank's Ficc and equities sales teams competing for the same client dollar – an increasingly important factor as the bank looks to selectively ramp up in Ficc where other houses are retrenching.
The push away from the lender's traditional equities base seems to be working, too: "One of the leading players on credit indexes is definitely SocGen. They have been providing us with great service, trading capacity and driving innovation for many years," says the head of structured products execution at a large Nordic bank.
In credit, the bank has been at the forefront of one the biggest trends of the year – repacking the basis between credit indexes and their constituents and selling it on to low-risk investors looking for some additional pickup. The bank has done brisk trade in the products for a range of investors, from French insurers to traditional Schuldschein buyers in Germany.
Beyond the looming rollout of Priips, some see macroprudential regulation as a more existential threat to structured products issuance – most obviously, the Financial Stability Board's total loss-absorbing capacity (TLAC) framework for global systemically important banks. But here, too, SG has spotted what may prove to be a valuable opportunity in France's implementation of Europe's version of the rules.
"For French banks, essentially there will be a new category of debt created. Structured products will either be issued as senior preferred debt, with a super-strong credit rating – essentially the same level of risk as a deposit-holder faces; or they will be issued as a vanilla bond – still senior, but lower in seniority to senior preferred. From a credit point of view, the investor gets a safer deal with senior preferred, but the yield will be lower than on a vanilla bond. TLAC will create an additional choice for investors: some institutions who want to benefit from a higher yield will probably ask for the bonds to be repackaged into a product with another leg – a structured coupon, for example. Investors who are more retail-like and who value safety most will probably go for senior preferred," says Saffon.
Already a trailblazer in the field of bond repacks, SG has also been a prominent player in one of the year's big initiatives, spearheading a bid to simplify and harmonise documentation differences between issuers with the aim of speeding up client onboarding.
Saffon explains: "It's generally time-consuming for clients to sign off on repack deals, because every issuer has its own set of documents. In substance, these are pretty much the same, but in form they are very different. Clients need to hire lawyers and make sure they understand all facets – which is fair. But if a client is talking to several issuers simultaneously, he might get very different views. We're aiming for a client to only have to approve one set of documents."
The pitch for a straightforward documentation solution contrasts to the approach taken by rivals, several of whom have looked to back a multi-issuer platform for repacks, which has yet to launch some months after first being announced.
The week on Risk.net, March 10-16 2018Receive this by email