Toyota plans currency-linked notes via Morgan Stanley; third-party issuers important now, distributor says

By Kenneth Lim

Boston, Oct. 7 - Toyota Motor Credit Corp.'s planned offering of currency-linked principal protected notes highlights the role that third-party issuers can play in supporting the structured product market, a distributor said.

Toyota, a triple-A rated issuer, plans to price zero-coupon dual participation capital protected notes due October 2011 linked to a basket of six emerging currencies relative to the U.S. dollar.

Morgan Stanley is the agent for the offering.

The basket comprises equal weightings of the Brazilian real, the Chinese yuan, the Czech koruna, the Hungarian forint, the Indian rupee and the Mexican peso.

At maturity, if the basket appreciates relative to the U.S. dollar, investors will receive par plus the basket return. If the basket depreciates relative to the U.S. dollar, investors will receive par plus 20% to 30% of the absolute basket performance.

The downside participation rate will be set at pricing.

Strong issuer credit a plus

Products by issuers with strong credit ratings or low credit default swap spreads are healthy for the structured product industry, the distributor said.

"It's always good to see more Aaa issuers," the distributor said. "I think it's one of the things our market needs right now. A lot of investors are worried about the default risk of the issuers, and for some of them this could be keeping them away from structured products, so having a big issuer with a stable and well established credit goes a long way to addressing some of those concerns.

"As it is, with all the fear in the market, some people are already afraid of venturing into structured products, regardless of the merits of the investment class. The last thing they want is to have to worry about the issuer's credit rating."

The third-party issuers are especially welcome in today's market, the distributor said.

"Frankly, if you want to buy a structured note from a bank with a good credit rating and CDS spread, there aren't that many options for you right now," the distributor said.

Third-party issuers could gain

Given the high CDS spreads of U.S. banks at the moment, the market could be primed for more third-party issuers and open architecture platforms, the distributor said.

"I think it's the sensible option," the distributor said. "If I'm a bank with a large CDS spread, if I try to issue my own structured note at this time, it's going to cost me more to do that, and there might not even be that many interested investors. But I've still got my distribution network and my expertise, so I can leverage that and help other companies that need to raise money.

"I think Morgan Stanley has been quite active with that, this isn't the first time they've worked with Toyota. A lot of people have worked with the Swedish Export Credit Corp. [AB Svensk Eksportkredit] and Eksportfinans.

"I'm not on the issuing side, so I'm not an authority on this, but I suspect one of the reasons we don't see more from these issuers isn't because the banks don't want to do it," the distributor said.

"I think it's more a result of not finding enough issuers with the right credit to do this. If you find the companies that can offer something like this, you still have to sell the idea to them, and that's one of the common challenges for all of us in structured products. Our industry is still very young in the U.S., so there's still a lot of education we have to do before adoption becomes more widespread."

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