Innovation is often discussed as variations on the themes of options, insurance and arbitrage, but one shouldn't underestimate the importance of marketing. Among deals selected for Euromoney's annual review of innovations, several are conceived with "capturing the imagination of the market' in mind. Hill-Samuel's step-down floater (see below) is an example of a deal structured to appeal to investors who might otherwise have been unwilling to take 30-year, merchantbank risk. The structure was conceived to encourage investors to focus on the high coupon payments in the early part of the maturity.
Not everyone reacts well to new ideas. Corporate treasurers are daily faced with a barrage of innovations, which lead treasurers such as David Robison of Chrysler Financial Corporation to say: "Quit throwing these caps and floors on every deal.' (Euromoney, August 1986). The feeling is that over-sophistication makes it impossible to calculate the risk involved. Another adverse effect of novel structures is illiquidity: active trading on tight spreads is extremely difficult with such a plethora of price structures.
Nevertheless, there is money to be made.
FIRST CARROT AND STICK
Borrower: Birmingham Tyre and Rubber (BTR)
Issued: October 28 1985
Amount: $150 million (coupon 5%) and Ecu 170 million (coupon 4 1/4%), both convertible into common
Maturity: 1995
Arranger: Swiss Bank Corporation International/ Hill Samuel
A prime example of necessity being the mother of invention.