Nordic region sees surge in demand for credit and commodity-linked products

The Finnish Structured Products Association has recently reported a 273% year-on-year increase in volumes for credit-linked structured products in Finland, while commodity-linked products saw a 277.72% surge year-on-year.

Stronger appetite for products linked to credit and alternative assets holds true across the Nordic region, boosted by poorly performing equity markets.

“We saw a big increase in credit-linked products last year, mostly in the form of baskets of credit-linked notes based on underlyings such as local Finnish names or the iTraxx Crossover index,” says Tony Watts, senior structurer at Nordea Markets in Finland. “One of the main drivers was the wide spreads coming off the back of the sovereign debt crisis, which caused corporate spreads to widen significantly, making for attractive headline coupons when compared to historic default and recovery rates. In addition, simplifying products, for example by making the recovery rate fixed and settling everything at maturity, made explanations to clients easier.”

Credit-linked and hybrid products involving credit overlays have been particularly popular among private banking and institutional investors seeking to boost yield pick-up.

“Investors started looking for alternatives to equities last year and credit as an asset class has become a clear trend,” says Daniel Eskilsson, responsible for the Swedish retail market at JP Morgan in Stockholm. “The first structures were quite simple, such as baskets on single names or index-linked structures, and over the past year this evolved into adding equity exposure on top of the structures to use the pick-up you can get from using credit risk to buy more equity exposure. This also shows a stronger risk appetite in general, with interest in investing in high yield.”

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