The shelf space for one of the newer wrinkles in the marketplace for retail structured products has become a little more crowded. Montreal-based National Bank of Canada and Claymore Investments Inc. of Toronto, in partnership with Merrill Lynch Canada Inc., have recently launched issues of non-principal-protected notes, which are aimed largely at investors disgruntled with the performance of global equity investments.
Pioneered in Canada by Merrill Lynch, these NPPNs offer beefed-up returns from investing a basket of mostly foreign stock market indices.
If the underlying indices increase in value over the note’s life, a multiplier is applied to boost returns. If the indices lose value, the multiplier is not applied. In addition, returns are currency-h
edged, which means the return isn’t affected by the movements in the Canadian dollar over the life of the investment.
However, there is no guarantee that investors will get their money back at maturity; also, investors don’t receive any income payments prior to the product maturing.
Toronto-based Claymore recently closed its first deal, a co-branded offering with Merrill Lynch. Known as Merrill Lynch Claymore Global Fundamental Index Accelerator, the offering raised $30 million, the largest of Merrill Lynch’s domestic deals. Return is based on performance of several interna-tional equity indices developed by Claymore. Investors are entitled to a 150% participation rate on returns. Claymore and Merrill Lynch are working on a second offering set to close Dec. 21, also based on performance of international indices.
An investor who buys a NPPN is “basically guaranteed to outperform the market if it’s positive and not to perform worse than the market if it’s negative,” says Som Seif, Claymore’s president. “For high net-worth investors and for institutions, this is regarded as a high-quality product, given that they will always be in the equity market. It’s suitable for long-term investors.”
National Bank recently placed two NPPNs. In September, it raised about $4 million for CI Oil Sands and Energy EARNS (enhanced accelerated return note securities). The product offered investors an “accelerated participation rate of 150% of positive return on the reference portfolio,” which is a basket of oil and gas stocks managed by Toronto-based CI Investments Inc. The investor is liable for 100% of any negative return.
In October, the bank offered S&P/TSX Enhanced Return Bear Note Securities. The product raised about $7 million. It has a two-year term to maturity and is designed to benefit from a decline in the S&P/TSX composite index. Because the index is domestic, currency protection wasn’t an issue.
Merrill Lynch has been the largest issuer of NPPNs via its Accelerator series. It has raised about $150 million from a mix of public and private deals over the past 12 months.
“The products are long global equity investments, not principal-protected, meant to [compete] with global mutual funds and global exchange-traded funds,” says Scott McBurney, head of private-client structured solutions at Merrill Lynch.
“They are way more efficient. They are one-to-one on the downside, which means the investor’s exposure to a decline in the index is no greater than [it would be] with a mutual fund or an ETF. But we are guaranteeing the investor upside outperformance with a full currency hedge.”
A typical Accelerator offering runs at least six years and offers an accelerated participation factor of at least 140%. Should the reference basket be lower at maturity, the holder shares in the loss.
Some deals have a floor on how much an investor can lose. The advisor is paid a one-time up-front 4% fee. IE
Beefing up returns
Recent non-principal-protected notes issues are also currency-hedged
- By: Barry Critchley
- December 5, 2006 October 30, 2019
- 13:39