Mediobanca’s new Credit Linked Notes (Serie 200) is the first structured retail product to be added to the Itailan SRP database with a capital return linked to a default risk based not only on the issuer but also on a reference entity, which in this case is Banca Italease.
The notes offer, over the three-month investment period, a monthly coupon equal to the Euribor one-month rate plus 2.25%. At maturity the capital will be paid in full provided that Banca Italease remains solvent during the investment period. Otherwise, capital back is equal to the market value of the bond.
The reference entity, Banca Italease has been involved in the last weeks in some financial problems. At the beginning of August it announced a net loss of €686 million from its derivatives business and at the moment is busy restructuring its risk management and control processes.
The bank started trading derivatives in 2003, but only experienced problems from January this year. Many of the contracts were highly leveraged and included barriers referenced to Euribor – the instruments provided enhanced returns so long as Euribor remained within a pre-specified range. As European interest rates started to rise, the barriers were breached, causing sizeable mark-to-market losses for the bank.
The issuer, Mediobanca, has so far this year launched 44 structured retail products for an estimate volume of €1.3bn. Although it tends to issue vanilla uncapped calls and digitals (ten apiece), on the more exotic side it has issued altiplano, steepener, fixed upside and worst of option products, among the others.
Credit default products are not very popular in Europe. In 2007 we registered 110 such products with Germany at the top of the list with 36 products ( 33%), followed by Sweden with 26 products (24%) and Switzerland with 16 products (15%).
This product appears on the Italian database.
