Structured products that rely on “counterparty” banks to protect investors’ capital have become riskier as a result of the worsening eurozone debt crisis, according to advisers and product providers. But new products that hold gilts as collateral, or use multiple counterparties, are seeking to limit the risk – while offering returns of up to 8 per cent a year.
In recent weeks, UK and European banks have seen their credit ratings downgraded, as markets have expressed growing concern over their exposure to Greek and other euro-denominated debt. Because structured products make use of these banks’ own bonds, to deliver a return of investors’ capital at the end of their terms, they too have appeared less secure.
Ian Lowes, managing director of advice firm Lowes Financial Management, which runs the CompareStructuredProducts.com website, says: “If the euro crisis has led to a situation where it is more likely that a bank will default then, yes, it has increased counterparty risk. The downgrading of institutions by credit rating agencies obviously serves to increase the perception of it.” Colin Dickie, managing director of investor solutions at Barclays, agrees. “Higher priced credit default swaps (CDS – the contracts that provide protection against default) and financial downgrades have brought counterparty risk to the fore.”
Some argue that the perception has grown faster than the risk itself. “We have been in a heightened risk environment for four years, so maybe the crisis has increased the awareness of counterparty risk for European institutions, where originally the fears were concentrated on US and UK financials,” suggests Marc Chamberlain, executive director at Morgan Stanley.
Tom Becket, chief investment officer at PSigma Investment Management, believes the products themselves are not that much less attractive. “Given the perception that all structured products are risky and evil, the latest onset of the Greek and European tragedy has not caused a material deterioration in structured products’ prices,” he notes.