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Institutional Structured Products. May 2013. Agenda. Catley Lakeman Securities Institutional Structured Investments Composition Institutional Structured Investments Examples – Accelerators / Supertrackers Institutional Structured Investments Examples – Range Accruals
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Institutional Structured Products May 2013
Agenda • Catley Lakeman Securities • Institutional Structured Investments Composition • Institutional Structured Investments Examples – Accelerators / Supertrackers • Institutional Structured Investments Examples – Range Accruals • Institutional Structured Investments Examples – Defensive Autocalls • Why Use Structured Investments? • Appendix
Catley Lakeman Securities • Founded July 2008 • Team of 9 • Combined investment sales experience –42 years • Combined structured investment trading experience –34 years • Combined structured investment specific experience –54 years
Catley Lakeman Securities • FSA authorised securities and futures firm • Outsourced origination and distribution business, representing seven banks on a contractual basis • Sell and support (ie in both the primary and secondary markets) private placement securitised derivative investments to professional asset managers and institutions in the UK Source: Bloomberg, data as at 01-May13
WHAT ARE STRUCTURED PRODUCTS? • A structured product is a defined-return investment based on the performance of an underlying asset • Factors to determine at the outset: • Underlying asset – equity indices, commodities, interest rates, etc • Payoff – depends on your investment view, the risk/ return profile, income vs growth • Counterparty – mark-to-market considerations, diversification of issuers
Option package Providing Economic Return STRUCTURED INVESTMENT COMPOSITION Hard Protection GBP1.00 Investor’s Cash GBP1.00 Zero- coupon Bond/ Swap • Share Price at Issue 100.00p • ZCB / Swap inc. funding pickup 91.79p • Aggregate Costs 1.49p • Amount to invest 6.72p Price of 1 call option at today 9.70p Therefore with 6.72p, investor can buy 0.69x call options / 69% participation. • How is a Structured Investment put together? • Indication of AA- rated issuer 5 year Capital Protected Participation Note today
Option package Providing Economic Return STRUCTURED INVESTMENT COMPOSITION Soft Protection • Share Price at Issue 100.00p • ZCB / Swap 89.10p • Aggregate Costs 1.49p • [Sell put risk premium -17.96p] • [Amount to invest 27.37p] • Price of 1 call option at today 10.64p • Therefore with 27.37p, investor can buy 2.58x call options / 258% participation. Option package Providing Economic Return • How is a Structured Investment put together? • Indication of AA- rated issuer 6 year Accelerator Participation Note (protection at 60%) today GBP1.00 Investor’s Cash GBP1.00 Zero- coupon Bond/ Swap GBP1.00 Zero- coupon Bond/ Swap Sell 6yr European Put Option on the FTSE Risk At 60% Strike (‘Knock-In Put’)
INSTITUTIONAL STRUCTURED INVESTMENT EXAMPLES1. Accelerators / Supertrackers2. Range Accruals3. Defensive Autocalls
INSTITUTIONAL STRUCTURED INVESTMENT EXAMPLES1. Accelerators / Supertrackers2. Range Accruals3. Defensive Autocalls
Acclerators / Supertrackers • Seen by many as a cost-effective ETF replacement • Given 90% of respondents to the 2012 questionnaire were bullish, it is likely we will see more of these structures over the next year • Not usually held for more than 1 to 2 years
Construction • HSBC 5.5 year Fixed Rate Bond • Yielding roughly 3.3% per annum at time of issue • Remove coupons • Present Value of coupon stream over 5.5 years: 17p • Left with an HSBC zero coupon bond worth 83p • Incorporate ‘soft protection’ • 60% soft protection on S&P 500 at maturity • Sell knock-in put: 12.5p • Incorporate upside • 100 – 83 + 12.5 = 29.5p to spend • 1 S&P call option is 16.5p; 29.5 / 16.5 = 1.79 call options HSBC 5.5 year Fixed Rate Bond Remove Coupons Incorporate ‘soft protection’ Incorporate upside All data as at time of issuance (Feb-11)
Mark-to-Market Source: Bloomberg, data to 1-May-13
Performance • Since launch performance: 29.35% versus 18.20% sector average in the below list of funds Source: Bloomberg, Financial Express, data to 1-May-13
INSTITUTIONAL STRUCTURED INVESTMENT EXAMPLES1. Accelerators / Supertrackers2. Range Accruals3. Defensive Autocalls
Range Accruals • The other success story over the last year, beyond autocalls • With the backdrop of falling rates, falling vol and tightening credit, in most cases these structures have outperformed the market
Construction (‘Synthetics’) This slide shows the evolution of a live trade. MANAGER CONSIDERATIONS & DECISIONS HOW TO GET HIGHER YIELD RESULTING STRUCTURE HSBC 6y Fixed Rate Bond Yield : circa 3.00% Which underlying should the structure be linked to? FTSE Put capital risk HSBC 6y FTSE Reverse Convertible To what extent is the manager prepared to put capital at risk? Soft protection at maturity at 3500 points. Yield : circa 5.00% HSBC 6y FTSE Digital At what level should the lower barrier be? Coupon paid annually as long as the FTSE is over 3500 points. Put coupon at risk (via lower barrier) Yield : circa 6.85% At what level should the upper barrier be? 7% annual, accrued daily for every day the FTSE closes within the range of 3500 to 7500 points. HSBC 440 6y FTSE Range Accrual Put coupon at risk (add upper barrier) Yield : circa 7.00% Any additional considerations? In this instance the investors wanted semi-annual income, so the structure pas up to 3.5% semi-annually. *All pricing as at circa early Oct-12
HSBC 6y FTSE Reverse Convertible (5.00%) *All pricing as at circa early Nov-12
HSBC 6y FTSE Digital (6.85%) *All pricing as at circa early Nov-12
HSBC 440 FTSE Daily Range Accrual (7.0%) *All pricing as at circa early Nov-12
Eg: HSBC 363 FTSE Daily Range Accrual (8.0%) Source: Data as at 29-Jan-13
Mark-to-Market Source: Bloomberg, data as at 01-May-13
INSTITUTIONAL STRUCTURED INVESTMENT EXAMPLES1. Accelerators / Supertrackers2. Range Accruals3. Defensive Autocalls
Defensive Autocalls • Performance of Defensive Autocallables is predictable and defined • Bull market: Underperform • Bear market: Likely to outperform • “Flattish” market: Outperform significantly • AutocallBacktest Analysis – illustrating where outperformance tends to occur
Payoff Unless the capital protection has previously been breached
Mark-to-Market Structure outperformance to date: 9.77% Structure annualised volatility: 14.51% FTSE 100 annualised volatility: 19.93%
Performance • Called in Year 2 (8th October 2012), with the FTSE at 5841.74 points • Over the two years since launch, the structure doubled the return of the market with less volatility Source: A selection of popular UK funds, all rated AAA/AA by Citywire
Why Use Institutional Structured Investments? • Why use Structured Investments in a portfolio? • They can be tailored to an investors’ specific requirements • They offer an investor access to a wide variety of underlyings (equities, indices, interest rates, inflation, commodities etc) • They can be structured via a variety of different outcomes at maturity, that are generally very simple to understand • They tend to do ‘exactly what it says on the tin’- both the returns and the risks are easily definable • As are the costs • They should be used as an active investment, which is facilitated by a liquid secondary market (they have proved to be almost the most liquid asset you can hold) that CLS services
TYPES OF STRUCTURED INVESTMENTS SELLING VOLATILITY DEFINED RETURN YIELD ENHANCEMENT Autocalls Defensive Autocalls Worst-Of Autocalls Sit alongside: Equity income funds and absolute return funds AUTOCALLS Synthetic Zeros Digitals Range Trades Range Accruals SYNTHETICS Sit alongside: ZDPs Reverse Convertibles Digitals Range Trades High Income Range Accruals Inflation Plus INCOME Sit alongside: Income funds PARTICIPATION Accelerators Supertrackers UNCAPPED Sit alongside: Large cap / core long only funds and ETFs CAPPED Call Spreads ACCESS TO A PARTICULAR UNDERLYING Usually participation in the form of an Accelerator, (but not always) Sit alongside: Other vehicles accessing the same underlying asset
TWO COMMON PAYOFFS Defensive Autocall • Defensive Autocall terms • HSBC • 6 year maximum term • GBP denominated • FTSE underlying • 8% annual snowballing coupon • 5% falling barriers • (100/ 95/ 90/ 85/ 80/ 75 as a • percentage of strike) • Soft protection at 60% at maturity • (European Knock-In Put) • Start Date: Investor invests 100p • Start Date + 1 year: Is FTSE above 100% Structure terminates and • of Start Level? pays back 108p • Start Date + 2 years: Is FTSE above 95% Structure terminates and • of Start Level? pays back 116p • Start Date + 3 years: Is FTSE above 90% Structure terminates and • of Start Level? pays back 124p • Start Date + 4 years: Is FTSE above 85% Structure terminates and • of Start Level? pays back 132p • Start Date + 5 years: Is FTSE above 80% Structure terminates and • of Start Level? pays back 140p • Start Date + 6 years: Is FTSE above 75% Structure terminates and • of Start Level? pays back 148p • Is FTSE above 60% Structure terminates and • of Start Level? pays back 100p • Structure terminates and investor loses 1% for • every 1% the FTSE has fallen from start to end date YES NO YES NO YES NO YES NO YES • Alternatives for higher yield • Move autocall barriers • Move soft protection level • Different Counterparty • Flat Autocalls • Worst- Ofs • Phoenix NO YES NO YES NO
TWO COMMON PAYOFFS Range Trade • Range Trade terms • HSBC • 6 year term • GBP denominated • FTSE underlying • 8.5% paid out coupon • Range: 3500-7500 points, • annually observed • Soft protection at 3500 (60%) • at maturity • (European Knock-In Put) • Start Date: Investor invests 100p • Start Date + 1 year: Is FTSE between Investor receives 8.5p coupon • 3500 and 7500? Investor receives no coupon • Start Date + 2 years: Is FTSE between Investor receives 8.5p coupon • 3500 and 7500? Investor receives no coupon • Start Date + 3 years: Is FTSE between Investor receives 8.5p coupon • 3500 and 7500? Investor receives no coupon • Start Date + 4 years: Is FTSE between Investor receives 8.5p coupon • 3500 and 7500? Investor receives no coupon • Start Date + 5 years: Is FTSE between Investor receives 8.5p coupon • 3500 and 7500? Investor receives no coupon • Start Date + 6 years: Is FTSE between Investor receives 8.5p coupon • 3500 and 7500? Investor receives no coupon • Is FTSE above Structure terminates and pays • 3500 (60%)? 100p • Structure terminates and investor loses 1% for • every 1% the FTSE has fallen from start to end date YES NO YES NO YES YES YES YES YES NO NO NO NO NO • Alternatives for higher yield • Narrower range • Move soft protection level • Different Counterparty • Less yield • Memory feature • Range Accrual
Option package Providing Economic Return GBP1.00 Investor’s Cash GBP1.00 Zero- coupon Bond/ Swap • Share Price at Issue 100.00p • ZCB / Swap inc. funding pickup 74.61p • Aggregate Costs 1.49p • Amount to invest 23.9p Price of 1 call option at launch 14.06p Therefore with 23.9p, investor can buy 1.7x call options / 170% participation. • Why don’t you see many capital protected structures today? • But first, let’s look back to the good old days of 2005… • Estimation of 170% Barclays 5 year FTSE Accelerator Bond (Traded 1-March-2005). • * We think this matured at 117p.
Option package Providing Economic Return GBP1.00 Investor’s Cash GBP1.00 Zero- coupon Bond/ Swap • Share Price at Issue 100.00p • ZCB / Swap inc. funding pickup 91.79p • Aggregate Costs 1.49p • Amount to invest 6.72p Price of 1 call option at today 9.70p Therefore with 6.72p, investor can buy 0.69x call options / 69% participation. • How this new issue prices today. • Indication of AA- rated issuer Capital Protected Participation Note today • * This answers the question posed ‘Why don’t you see many capital protected structures today?’
Option package Providing Economic Return • Share Price at Issue 100.00p • ZCB / Swap 91.79p • Aggregate Costs 1.49p • Old amount to invest 6.72p • [Sell put risk premium -14.93p] • [New Amount to invest 21.65p] • Price of 1 call option at today 9.70p • Therefore with 21.65p, investor can buy 2.23x call options / 223% participation. Option package Providing Economic Return • So what does look good today assuming that you are looking for market linked upside? • Indication of AA- rated issuer 5 year Accelerator Participation Note (protection at 60%) today • * Depending on the market, we feel these accelerators (supertrackers) are a good alternative to passive or quasi-passive long only funds. GBP1.00 Investor’s Cash GBP1.00 Zero- coupon Bond/ Swap GBP1.00 Zero- coupon Bond/ Swap Sell 5yr European Put Option on the FTSE Risk At 60% Strike (‘Knock-In Put’)
Option package Providing Economic Return Share Price at Issue 100.00p ZCB / Swap 73.79p Aggregate Costs 1.49p Old amount to invest 24.72p [Sell put risk premium -4.04p] [New Amount to invest 28.76p] Price of 1 call option at March 2005 14.06p Therefore with 28.76p, investor can buy 2.05x call options / 205% participation Option package Providing Economic Return • Let’s look back to see how this would have priced in 2005. • Estimation of 5yr FTSE Accelerator Participation with Soft Capital Protection at 60% of initial level (Trade date 1-March-2005) • * Depending on the market, we feel these accelerators (supertrackers) are a good alternative to passive or quasi-passive long only funds. GBP1.00 Investor’s Cash GBP1.00 Zero- coupon Bond/ Swap GBP1.00 Zero- coupon Bond/ Swap Sell 5yr European Put Option on the FTSE Risk At 60% Strike (‘Knock-In Put’)
Option package Providing Economic Return Option package Providing Economic Return • Indication of AA- rated issuer 6 year Accelerator Participation Note (protection at 60%) today GBP1.00 Investor’s Cash GBP1.00 Zero- coupon Bond/ Swap GBP1.00 Zero- coupon Bond/ Swap • Share Price at Issue 100.00p • ZCB / Swap 89.10p • Aggregate Costs 1.49p • [Sell put risk premium -17.96p] • [Amount to invest 27.37p] • Price of 1 call option at today 10.64p • Therefore with 27.37p, investor can buy 2.58x call options / 258% participation. Sell 6yr European Put Option on the FTSE Risk At 60% Strike (‘Knock-In Put’)
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