Corporate Bond Products and Derivatives英文版).PPT

1、CorporateBondProducts andDerivatives,APECFinanceandDevelopmentProgram FrankKwong Director AsiaCreditTrading,2,Contents,Introduction The Building Blocks Anatomy of a Bond Asset Swaps Default Swaps Total Return Swaps Credit Linked Notes Repackaging,Introduction,What Are Credit Derivatives?,Credit deri

2、vative returns are tied to the performance of a credit risk related measure. These include: default by a counterparty credit spreads related to a reference asset Like other derivatives, credit derivatives allow for the isolation and transfer of a particular type of risk - in this case, credit risk T

3、he basic products in the credit derivative market are: Asset Swaps Credit Default Swaps Total Return Swaps By combining these with technologies like repackaging and securitization, tailor made products and risk management solutions are possible,Credit Derivatives - New and Not New,Although credit de

4、rivatives traded under ISDA documentation are relatively new, similar products have existed in the commercial banking world for decades:,Market Participants,Banks are the largest buyers and sellers of credit protection, accounting for over 50% of market volume Insurance companies are expected to bec

5、ome more active in order to improve returns on capital Mutual funds and corporations are beginning to view credit derivatives as hedging instruments and/or attractive investment alternatives, particularly in high yield and emerging markets,Why Use Credit Derivative Products?,Creating Access Tailor c

6、redit, maturity, duration, currency and convexity exposures Provide greater yield than available “cash” alternatives Limit or reduce credit or default exposures (i.e., buy protection) Provide leverage (if desired) Diversify simply into new asset classes Create insurance products through Credit Defau

7、lt Swaps Hedge Portfolios of Credits,Building Blocks,Building Blocks,Anatomy of a Bond Asset Swaps Cross Currency Asset Swaps Credit Default Swaps Total Return Swaps,Building Blocks,Anatomy of a Bond,What Do You Get When You Buy a Bond?,Investment of Capital Interest rate and currency risk Risk of D

8、efault Country Risks Confiscation, expropriation, restrictions on convertibility/transfer, tax risks Company Risks Business risks, industry risks, regional risk Legal / Regulatory Rights and Obligations Ownership for Tax Purposes Ownership for Accounting Purposes Ownership for Regulatory Capital Pur

9、poses (Banks Only) Ownership for Domicile Purposes,12,Components of a Bond Yield,* Expropriation / Confiscation * Convertibility / Transfer,* Business Risk * Industry Risk * Regional Risk,Risk free value of money. Investment Risk,E.G. - 3 Year, Fixed Rate, Corporate Bond, (Price = Par, Average Rate

10、= Risk Free + 275 bps),Building Blocks,Asset Swaps,14,Asset Swaps,The product allows the following; Stripping out interest rate risk by converting fixed payments to floating, or vice versa Stripping out currency risk by converting cash flows in one currency to cash flows in another currency Strippin

11、g out equity risk in a convertible bond to leave a pure credit piece In each case, however, there is residual risk in the event that the underlying bond goes into default. This risk is specially high in case of high correlation,15,Cross Currency Asset Swap,Cash instrument available in an undesirable

12、 currency (e.g, several credits have debt denominated only in USD, and none in HKD) Offshore pricing of credit vis a vis onshore pricing of credit offer relative value opportunities Gain access to the cheapest asset available for a particular currency, regardless of currency of denomination Gain acc

13、ess to new markets - US A credits much wider than Asian A credits. For HKD investors looking to diversify into other asset classes / markets, cross currency asset swaps offer a solution Risk - in the event of default of the underlying bonds, investor still has a cross currency swap exposure. E.g, if

14、 swap is from USD to HKD, and HKD depreciates, there is mark-to-market loss on the swap. Credit consideration on the counterparty, specially for long dated swaps,16,Cross Currency Asset Swap,Swapped Coupons in HKD,Buyer,Seller,Coupons of Bond,On Coupon Dates,Cash Price in HKD at Spot (Initial Spot),

15、Buyer,Seller,Bond,On Settlement Date,Buyer,Seller,On Maturity Date,Redemption Amount of Bond,Swapped Redemption Amount in HKD,Building Blocks,Credit Default Swaps,Credit Default Swap,A transaction which allows the transfer of the credit risk of a Reference Entity between counterparties in swap form

16、Two parties enter into a swap agreement whereby the protection buyer pays a fixed periodic payment, usually expressed in basis points per annum on the notional amount, for the life of the agreement the protection seller makes no payments unless some specified credit event relating to a Reference Ent

17、ity occurs, in which case the protection seller is obligated to make a contingent settlement,19,Investor,Fee,BNP Paribas,Investor sells default protection,Zero,Contingent Settlement,Credit Event,Credit Default Swap,Credit Default Swap,Transforms asset specific credit risk to Reference Entity risk Co

18、ntingent settlement, which is triggered by a Credit Event can be calculated in several ways. Settlement options include physical delivery of Reference Obligation (or other Deliverable Obligations) in exchange for par value cash settlement based on a pre-determined percentage of notional cash settlem

19、ent equal to (Par - Recovery Value) * notional “Deliverable Obligations” defines what assets are eligible for delivery as settlement in a physical delivery contract. Usually includes Reference Obligation but can often be broader “Obligations” defines what assets may trigger a Credit Event,Credit Def

20、ault Swap,Credit Events may include Bankruptcy, Failure to Pay, Obligation Default, Restructuring, Repudiation/Moratorium Maturities usually run from 1-10+ years and transaction sizes range from USD 5mm to 100mm Liquidity varies significantly dependent on reference credit, maturity, and number of as

21、sets making up the credit curve. Bid offer spreads range from 5-100+ bps, typically consistent with the liquidity of the underlying instrument,Credit Default Swap,Buyer of protection synthetically short a reference asset, credit, or portfolio hedge credit risk which otherwise cannot be sold due to r

22、elationship reasons free up credit lines Seller of protection synthetically long a reference asset, credit, or portfolio access exposure which may be otherwise difficult due to legal or settlement restrictions leverage,How Are Default Swap Spreads Derived?,Theoretical approach: default probabilities

23、 and recovery rates Asset Swap approach: Use LIBOR-based credit spreads from traded securities to define a credit spread curve for each Reference Entity sort data by: level of seniority (senior, subordinated, preferred stock, perpetuals) secured / unsecured domestic / external debt Factors that infl

24、uence the “basis” between cash and default swap spreads: repo costs of underlying securities surge in “illiquid” exposure (loan swaps) documentation mismatch,24,Key Risks in a Credit Default Swap,Default Risk of the Reference Entity Credit Spread risk (market risk) Counterparty Risk DOCUMENTATION!,B

25、uilding Blocks,Total Return Swaps,Total Return Swap,A transaction which allows the transfer of economic performance of an asset or portfolio of assets for a pre-defined set of cash flows Two parties enter into a swap agreement whereby the payer pays the total economic performance (all interim cash f

26、lows and any positive change in mark to market value) of an asset or portfolio of assets over the life of the agreement the receiver pays a pre-defined cash flow, usually a fixed spread over Libor, and any negative change in mark to market value of the asset or portfolio of assets,27,Investor enters

27、 into long total return swap linked to a portfolio of bonds,Portfolio price appreciation + interest + principal,Portfolio price depreciation + Libor + spread,BNP Paribas,Investor,Total Return Swap,Total Return Swap,Settlement can be handled in several ways final mark-to-market physical delivery at m

28、aturity where the total return receiver pays the previous mark-to-market price of the asset or portfolio in exchange for the actual securities Pricing depends upon a number of factors funding balance sheet constraints credit - both the riskiness of the asset as well as that of the counterparties are

29、 considered. Several methods can be employed to mitigate the risk of the transaction, including initial and variation collateral, and daily mark-to-market,Building Blocks,Credit Linked Notes,Credit Linked Note,Notes that have an embedded credit derivative which is tailored to satisfy investor requir

30、ements including maturity, currency, coupon, reference entity (credit), principal exposure, and issuer credit The credit linked note consists of: a coupon payout equal to the coupon from the issuers note plus the fee from selling the default swap on the reference entity the repayment of the principa

31、l of the note is linked to the credit risk of the reference entity. If a credit event occurs, the notes will accelerate and there will be a credit event settlement. Thus investors have credit exposure to both the reference entity and the issuer,31,Investor purchases a credit linked note,BNP,Issuer f

32、unding,Issuer,Investor,CLN coupon and principal subject to Credit Event,Issue Price,Credit Linked Note,Credit Linked Note,Notes can be structured as Medium Term Notes Amount of principal redemption is linked to the recovery value of the Reference Obligations. In the event of default, principal redem

33、ption may be cash or physical delivery of the Reference Obligations In the case of no default, investors continue to have exposure to the issuer of the Medium Term Notes or the underlying collateral of the trust Notes can also be structured to provide 0 to 100% principal protection,33,Credit Linked

34、Note - Risks,Credit Event Risk by Reference Entity May or may not be different from risks inherent in buying a bond or loan issued by the Reference Entity - documentation specific Issuer performance risk CLN yield = Issuer yield + default swap spread - issuance costs Lower the rating of the Issuer,

35、greater the risk of Issuer default Lower the rating of the Issuer, greater the spread volatility on the Issuer spread greater MTM volatility on the CLN,Building Blocks,Repackaging,35,Repackaging,Tailor made product delivered in a desired form Bonds / Notes Loans Trust Instruments Three elements: Spe

36、cial Purpose Vehicle (SPV) as the Issuer Underlying Collateral for the SPV Instrument OTC Derivative Contract between SPV and BNP,Special Purpose Vehicle,Investor,Principal,SPV Coupons,Underlying Bond,Principal,Bond Coupons,BNP as Swap Counterparty,Bond Coupons,SPV Coupons,Repackaged Asset Swap,Defi

37、nition: This is the basic structure for repackaged notes. The SPV purchases a bond from BNP Paribas, and immediately enters into a swap transaction with BNP Paribas. The investor owns a secured note, back by the asset swap package. Mechanics: The SPV, rather than the Investor, acts as the asset swap

38、 counterparty to BNP Paribas. There is no use of swap lines between BNP and investor as BNP effectively faces the SPV on a collateralised swap transaction. The Investors credit risk is similar to that of an asset swap: default risk on the Underlying Collateral, and default risk on the swap counterpa

39、rty.,Special Purpose Vehicle,Investor,Principle,CLN Coupon,Underlying Bond,Principle,Bond Coupons,BNP as Swap Counterparty,Bond Coupons,CLN Coupons,Repackaged Credit Derivative,Definition: Repackaged notes that have an embedded credit derivative and offer a yield pick-up for taking on exposure to the default of some reference asset via that credit derivative. This structure provides yield-enhancement on securitised asset swaps. Mechanics: Similar to asset swap securitisation except that the SPV sells default protection on a Reference Entity from BNP. Investors obtain leverage to the