Credit-linked notes (CLNs) and regulation dominated the Art of Distribution panel at the 3rd Nordic Structured Products and Derivatives Conference 2017, held 27 September in the Grand Hotel, Stockholm, moderated by Fredrik Bonthron, head of the Swedish Structured Products Association (SPIS).

The Swedish market has been "too dependent on equity" and saw as a "healthy development" the increase in issuance of credit-linked products, according to Fredrik Langley, founding partner at Strukturinvest. "The main reason for the increase of credit products is the demand from customers and distributors," said Langley.

Olof Andersson, financial adviser and chief executive officer at Karla Kapital, said that CLNs are not new and can also be used to balance a portfolio. "I've always sold lots of CLNs and I build capital protected portfolios," said Andersson. "[However], I don't focused on single names (underlyings), since there is too much risk."

According to Ilkka Väkeväinen, director, structured debt and investment at Taaleri Wealth Management, most of the company's clients in Finland are high net worth individuals or small-sized institutional clients so cashflow is one of the "key components why we have been active in credit since 2008". "Lately, credit has become to a certain extent a replacement for principal protected notes as the protected part of a portfolio and is targeted at investors who have been active in cash bond market: it's very difficult to buy those nowadays and CLNs are used as an access product to the fixed income world," said Väkeväinen. "There's multiple reasons for the popularity and different credit products meet different needs but it has been a big market for some years. Volumes have been 50% of total structured products sold."

In Norway, the story is quite different, according to Jørn Kjørsvik, chief executive officer and partner at Garantum Norge. "Credit is next to nothing in Norway," said Kjørsvik. "There is no interest and demand to CLNs so far but we keep an open mind. The credit products we have seen in the market are not from us. Maybe in the future we would like to offer CLN's but for the time being there are better alternatives for the clients."

When it comes to complexity, Väkeväinen noted that there has been an increase in complexity in fixed income, "so I wouldn't say that this is a trend, where structured products and CLNs are in isolation" said Väkeväinen. "The key is to understand the economic risk of these products. Then we talk about leverage credit which some of our clients like (significant minority) and we also talk about more complex credit pay-outs. Overall, CLNs are part of the fixed-income universe and they're very clear, fair and not misleading and they might be overly beneficial for the client. They will have liquidity in the cases where cash bonds will not have."

Langley does not think this is an easy question to answer as the products do not appear to be structured: for example, single name, which is very digital if something happens; but then we have iTraxx-linked leveraged structures, which are extremely complex products."

Bonthron pointed at concentration issues around particular shares, such as the Stena stock, and Langley agreed. "It is always a problem when you sell one-sided products, so, if you just sell credit linked to Stena or just autocalls, it is dangerous in the long run and sooner or later it will pay the price," said Langley. "The solution for the problem is to develop new kind of products which actually help the advisors to sell similar kind of structures but with less risk."

Väkeväinen also said that in the Finnish market CLN issuance is concentrated on local names and goes back as far as 2012 but when those stopped paying, the market had to start to focus on providing diversified credit risk.

"When selling concentrated CLNs, there should be a clear understanding between the investor and the product provider as these products have highly concentrated credit risk," said Väkeväinen. "As such, it shouldn't be recommended to exceed certain percentage point of your portfolio."

According to Andersson, there is nothing easier to sell than multi-name CLNs since the client can easily understand those and they are familiar with the names. "CLNs are much easier to sell than autocalls, although they don't have over 6% returns like autocalls do," said Andersson.