Interest rates house of the year: Natixis

Structured Products Asia Awards 2018

Samuel Plagnard, Natixis

Gaining clients and market share in the competitive Asian structured products market isn’t easy. The challenge is even bigger when it comes to the fast-developing interest rate derivatives structures. But Natixis has managed to do that by launching a slew of innovative instruments that ease clients’ costs and capital outlay.

This year has seen the French bank break new ground in the market for structured rates solutions, with the fixed-income team tailoring a range of new structures to address the needs of institutional and corporate clients hunting for yield, hedging cost reduction, regulatory optimisation, wrapper solutions and securities financing.

The bank’s poster child has been a suite of products designed to meet the asset-liability management needs of insurers from Taiwan to Japan, and hedging solutions for corporates and private equity companies.

These products are aimed either at enhancing the investment yield for insurers that have struggled with low interest rates globally, or reducing their capital requirements amid regulations such as Basel III and margining rules. Natixis also leaned on its foreign exchange franchise and offered hedging products that reduced the cost of funding.

“We’ve put together a nice suite of fixed-income payoffs,” says Samuel Plagnard, Hong Kong-based head of fixed-income sales and financial engineering for Asia-Pacific at Natixis’s corporate and investment banking unit. “We’ve been active in hybrids, especially credit rates, which include repackaged note formats. We’ve also provided non-banking financial investors with access to asset classes that are not available in the capital markets, helping them to diversify their alternative investment holdings.”

The bank’s financial engineers and risk management teams came up with bond forward transactions that reduced capital outlay for insurance companies and repackaged Japanese government bond into securities that reference higher-yielding currencies to enhance returns. It also recycled longer-dated bank loans into bonds that were sold to life insurers.

Natixis has developed a level of expertise in accounting and regulation that means it can offer tailor-made asset-liability management solutions to insurance companies across Asia-Pacific.  Working closely with insurers in bond forward transactions allowed the bank to instantaneously recognise capital reduction on the balance sheet by matching the duration of the interest rate-sensitive assets and liabilities without an initial capital outlay.   

The accounting treatment on this strategy is favourable, too, since a bond forward with physical delivery at expiry is eligible for hedge accounting, so any interim fair-value changes in the bond forward will not impact the insurers’ profit or loss.

“The cost of holding ultra-long-term assets is on the increase for banks due to higher capital consumption, hence reducing the need for long-term funding,” Plagnard says. “We have been able to find solutions with our ALM team at group level to recycle this long-term funding, allowing Natixis to issue long-dated structured notes so as to provide lifers with long-tenor investments matching their liabilities duration.”

Aside from cross-currency bond repacks, the bank has also structured 20-year callable constant-maturity-swap (CMS) steepener Japanese government bond (JGB) repack notes, with which investors receive a coupon linked to the difference between yen CMS 20-year and two-year on every interest payment date. The repack notes are callable semi-annually and pay a floating coupon up to 1.2%, almost doubling the yield of the underlying JGB.

It doesn’t stop there. Natixis offered asset repacks to boost the yield for investors besieged by the Bank of Japan’s negative interest rates. It repackaged JGBs into greenback or Australian dollar securities to offer them “attractive” risk-adjusted investment returns.

The bank’s financial engineers managed to do that by spotting an opportunity in the wide cross-currency basis that would allow insurance clients to boost their returns while maintaining exposure to Japan sovereign risk. Japanese investors view their sovereign credit as a risk-free investment.

For instance, two-year JGBs now yield –0.12%. Using a technique called asset swaps, however, they can be repackaged into two-year floating-rate dollar bonds that yield about 100 basis points more.

Natixis has also begun enabling investors to access products that are not available in the capital markets, such as loans for US insurance companies.  These include collateralised loan obligations that give exposure to US loans managed by well-known managers.

In addition to meeting the needs of insurers, Natixis has provided structures for private equity firms. “We’ve come up with unique combo solutions that allow private equity funds to access a foreign exchange hedging programme in a very cost-efficient way,” says Plagnard. “This has been possible by combining our strengths in global structured credit solutions with our forex trading capabilities.”

When private equity funds buy new assets they may need to do so using different currencies, which typically requires hedging out the currency risk. This is often done using instruments such as forex forwards, with banks passing the balance sheet cost and capital cost on to the client. The cost is usually determined by a credit analysis but as private equity funds aren’t rated, banks take security on the asset they are buying. 

This becomes costly for the funds. But Natixis combined the financing facilities with foreign exchange hedging instruments, allowing its credit risk and market risk teams to come up with netting for any exposure. This resulted in a very efficient cash and capital management tool.