Standard Chartered issues credit-tied note as sales jump

Standard Chartered has sold its biggest note tied to the debt of one of the mainland's four largest lenders as sales of similar credit-linked securities globally surge to a record.

London-based Standard Chartered issued US$80 million of three-year notes last month tied to obligations of Bank of China, the mainland's fourth-largest by market value. The deal is the third-biggest debenture linked to the credit of one of the mainland's Big Four banks.

In a low interest rate environment, investors are looking to credit-linked notes on the mainland's biggest banks for higher yields, according to John Goff, the head of global markets structuring for Asia ex-Japan at Nomura. Global demand for such notes has increased, with issuance totalling a record US$653 million so far this year, more than double the amount for all of last year. Excluding securities tied to the Big Four - Bank of China, Industrial and Commercial Bank of China (ICBC), China Construction Bank and Agricultural Bank of China - sales for the first nine months this year were down 3.22 per cent year on year.

"Most credit-linked note investors feel the incremental risk of Chinese banks over Chinese sovereign bonds is small, but the yield pickup is significant," Goff said. "There are few other Chinese names that have much liquidity in credit-default swaps in the high-grade space apart from the banks."

Credit-linked notes are securities that can use credit-default swap contracts to transfer the risk of the reference entity from the issuer to the buyer. Investors will usually get a coupon that's higher than the issuer's cash bonds and, if the reference entity defaults, the note's coupon payment and redemption will be affected.

Swaps protecting the debt of Bank of China against non-payment have ranged from 109 basis points to 161.5 basis points this year, according to data provider CMA. Swaps on ICBC, the mainland's largest lender, closed at 129.4 basis points on Thursday.