Bankers Trust Co.'s international arm has launched a derivative product geared to institutional investors hungry for a higher yield but constrained from investing directly in emerging-market debt.
The new $1 billion facility, called Tops Limited, will let Bankers Trust compete with other large financial institutions in the creation of bonds backed by emerging-market debt.
"Over the past several years, we have become more client-focused," said Suzanne Quigley, a spokeswoman for Bankers Trust International in London. "This type of product goes to the sophisticated side of the market, the kind of investor that understands the risk management aspect of it."
The trend toward prepackaged facilities like Bankers Trust's has picked up in the past year. Merrill Lynch & Co.'s program is the oldest and largest, by far. Its Steers program, introduced in 1993, has issued $12 billion of notes.
As yields on debt securities have fallen over the past year, investors have looked to bolster yields by investing in emerging markets. However, the cost of buying debt securities in these markets and then initiating swap transactions to create the type of cash flows desired made it impractical for most investors.
The new prepackaged facilities let investors easily and quickly overcome such barriers.
"Through this program, we are able to offer an asset swap in a security form which can be traded as a normal Eurobond," said Raj Shourie, a vice president in the balance sheet structuring group of Bankers Trust's investment banking division.
The Bankers Trust facility will buy bonds for a customer and hold them in trust. In turn, the trust enters into a swap transaction with the bank to create the cash flow stream desired and then issues certificates backed by the bond to the customer.
By prepackaging the facility, Bankers Trust and its competitors are able to issue bonds for a variety of customers and in a variety of tranches. Establishing a separate trust for each tranche means the default of one will not affect any other tranche.
"The beauty of this scheme is that each tranche of notes issued by Tops is ring-fenced from other tranches," said London-based Mr. Shourie. "So if one asset that has been securitized defaults, only that tranche of notes would be affected. The other tranches, which have been purchased by other investors, would not be affected."
Sources in the industry said most of the big investment and commercial banking houses in the United States offer similar services. Besides Bankers Trust, Credit Suisse Financial Products, Merrill Lynch, J.P. Morgan & Co., and Morgan Stanley & Co., among others, have created multi-issuance facilities.
These special-purpose vehicles are a way to mass distribute asset swaps, said a trader at a big dealer firm.
Many of these structures are created outside the United States. One source said the difficulties of keeping the trusts in compliance not only with local and federal laws but also with regulatory agencies makes it easier to establish the facilities in the Caribbean.
