Standard Bank has launched a new US dollar-denominated credit derivatives product, opening up African credit opportunities to global investors hungry for structured products. The programme will issue credit-linked notes (CLNs), providing exposure to otherwise inaccessible African credit and meeting growing African investor demand for portfolio diversification.

The Luxembourg structured note programme is designed to provide investors with the opportunity to access African yield in sovereign and corporate debt, including foreign exchange, through risk-managed structured products. Additionally, the Johannesburg Stock Exchange currently only offers investments listed in ZAR, so this product provides investors looking for wider opportunities the chance to invest in African yield through US dollar-denominated CLNs.

Hennie Snyman, co-head, client solutions for institutional investors, global markets at Standard Bank, comments: "We found that investors in Africa want something a little more interesting than the vanilla products they generally have access to and - as a result - they have been receptive to structured products."

He continues: "The need for portfolio diversification has also been a key driver of investor demand. We ultimately want to expand our reach across the continent and deliver into a wider investor base, which will no doubt happen as the market matures."

While Standard Bank has an existing product for CLNs, issued in ZAR, Snyman notes that there is strong demand for hard currency-backed notes. As a result, the bank has taken the initiative to issue listed US dollar structured notes, which has so far been "very well received by investors".

While the corporate bond market is well established in South Africa, CLNs can offer additional benefits in the form of yield and also open up a wider range of investment options. "CLNs provide yield enhancement through embedding single-name credit exposures into bank-issued notes. The notes provide a yield pickup to bank and corporate bonds and in addition enable investors access to credits not available in the corporate bond market," says Snyman.

There are additional benefits of the CLN product surrounding liquidity and risk management. He continues: "Also, with the development of high-quality liquid asset frameworks around bank liquidity risk management, CLNs can now be written to yield enhance these high quality credits with the additional bonus of liquidity within the CLN."

Snyman adds that asset managers are helping to drive the movement toward structured products due to a scarcity of assets which limits their ability to outperform their competitors. He suggests that CLNs enable firms to offer extra yield for their clients and to achieve "outperformance", although he adds that appetite for these products does vary according to credit and interest rate cycles; it is when interest rates drop and yield is harder to come by that products like CLNs become more appealing.

With CLNs and other credit derivatives, Snyman comments that a lot of time is needed to get investors comfortable with the processes involved. He says: "When introducing structured products to new investors, a large degree of work goes into investor education, with a particular focus on documentation, the general risks involved in the products and specifically the mechanics of credit derivatives when looking at CLNs."

While it is a steep learning curve, investors are often willing to take part. Snyman adds: "Once the investor beds down a deep understanding of the principles and risks, though, they are usually keen to participate and over time display strong appetite for the products."

For the time being, Snyman wants to broaden the product range under the Luxembourg programme and, by doing so, bring in a wider investor base. At the moment the majority of the investor base is South African and he is hopeful of bringing in investors from the rest of Africa, along with Europe and the US, and says investors have been very receptive and that the outlook for the development of the programme and issuance is positive.

He concludes: "We look to continue development of this programme and to source other exposures that we can embed into notes issued from it. Across the African continent, we believe that there is an interesting universe of risk transfer opportunities. There are a number of sources of credit and market risk that we can look to share through the programme."

RB