Source: CT Post                        Date: 18 May, 2011

ING sold USD6 million of three-year notes linked to Khan Bank LLC, Mongolia's largest bank, paying a coupon of 8.3 percent. Investors in the privately placed deal are exposed to both exchange rate and bank credit risks.

Credit-linked notes offer investors exposure to bonds that are normally difficult or costly to access. Banks already active in these countries can source bonds more easily and pass the returns on to investors at a lower cost.

Hedge funds are seeking credit-linked notes tied to bonds of the lowest-rated countries as yields on other fixed-income assets remain near record lows. "We have had some hedge funds saying they want some seriously exotic stuff," said Mr. Guy Thomas, the global head of emerging-market credit structuring at ING Groep NV, who sold a credit-linked note on Mongolia last week. "The East European and Latin American countries are pretty well exploited."

Banks issued notes linked to Egypt, Venezuela, Romania, Mongolia and Vietnam in the past two weeks, offering coupons as high as 13.2 percent. Ten-year U.S. Treasury yields are currently at 3.22 percent, compared with the 10-year average of 4.1 percent. The difference between yields on corporate debt and government bonds remains near record lows. Demand for notes which offer access to illiquid securities has surged as investors seek the higher-yielding investments.