Structured Note - Practitioner's Views
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Transcript Structured Note - Practitioner's Views
Structured Note and Funding
Alternatives
1
Agenda
Making of Structured Note
Risk/ Return
Concerns over Structured Note
Conclusion
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Power of Derivatives
Structured Note = Debt Instrument + Derivatives
Provides more alternatives to meet with Supply & Demand
“Tailor Made” and “Window of Opportunity” Concept
Linear and Non-Linear payout
Principal guarantee and Non-Principal guarantee
Payout Participation
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Making of Structured Note
Normal Fixed Income Note/ FRN
Fixed or Floating Coupon
Investor
Bond/Note
Issuer
Structured Note
Structured Coupon
Investor
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Structured
Note Issuer
Making of Structured Note
Investor VS Issuer
Issuer and Investor has to determine their requirement.
Issuer – Match their Asset and Liability
Investor – Interest rate or Benchmark views and Portfolio
diversification
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Investor
Taking views on bench mark or interest rate
Investor views on benchmark, i.e. interest rate, SET50, WTI,
Credit, is important in selecting fixed income note or
structured note.
Portfolio diversification
Instrument available in the market is the key in helping
investor better manage portfolio diversity, reducing price
risk and or unexpected loss to the portfolio
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Interest Rate VS Instrument
Lower Interest Rate Expectation
Fixed Rate
Higher Interest Rate Expectation
Floating Rate
Confidence that Interest will be lower
Inverse Floater
Confidence that Interest will stays
Range Accrual
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Making of Structure Note - Issuer
Issuers
Structured Note Payout
Bond
Structured Note Payout
ISSUER
THB Fixed Asset
Asset
By using Derivatives, issuers can match their funding need with
their Assets
Potentially able to achieve cheaper cost of fund thru some niche
investors
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Making of Structured Note - KBANK
Structured Note Payout
Fixed or Floating Payout
Asset/ Loan
Investor
For KBANK point of view, structured note can be used for
KBANK to match term-fund required by the company’s
asset thru the issuing of the note. Unmatched coupon
payout can be managed thru derivatives.
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Basic Structure
Derivatives
THB Fixed/Floating
Structured Note Payout
Investor
THB
THB – return on Asset
Loan/ Asset
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Making of Structured Note - Example
Floating Rate Note With Collar
Inverse Floater
Callable Inverse Floater
Range Accrual Note
Quanto Note
SET Linked Note
Credit Linked Note/ Deposit
WTI Linked Note
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Floating Rate With Collar
Return
Collar
0
1%
3%
5%
12
7%
Interest %
Floating Rate with Collar
Implied THB with Collar
THB IRO
THB
THB Floating
return on Asset
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Inverse Floater
Return
0
1%
3%
5%
7%
Interest %
Investor receives higher return when interest rate is lower
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Inverse Floater
THB interest rate Swap – Receive Fixed, Pay Float
Inverse Floater Note
THB IRO
THB
THB Floating
return on Asset
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Callable Inverse Floater
Investor receives higher return in year 1 while the Note can
be called back by issuer at any of the interest payment date
Return
0
1%
3%
5%
7%
Interest %
Investor receives higher fixed rate return in year 1, if Note is not called,
Payout of will be higher if interest rate is lower, otherwise, 0%
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Callable Inverse Floater
Fixed Coupon
Inverse Floater Coupon
Start Date
Maturity Date
Callable Date
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Callable Inverse Floater
THB interest rate Swap – Receive Fixed, Pay Float
THB Swaption
Inverse Floater Note
THB CAP
THB
THB Floating
return on Asset
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Range Accrual Note
Investor will receives higher return as long as index
benchmark is in between pre-determined range
Investment return is subject to minimum of 0%
Coupon = n / N * i %, subject to minimum of 0%
n = number of day index is in between range
N = Total number of days
I = interest per annum
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Range Accrual Note
Return
0
10%
30%
50%
20
70%
100% % Day in
Range
Range Accrual Note
THB interest rate Swap – Receive Accrual Payout
n/N * i% , minimum 0%
THB
THB Floating
return on Asset
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SET Linked Note
Investor will receive higher return if SET Index move
higher, other wise subject to minimum of 0%
Return
CAP Return
0
1%
3%
5%
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7%
SET Index
Increase %
SET Linked Note
SET Linked Note
SETI Cap Spread
THB
THB Floating
return on Asset
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Credit Linked Note/ Deposit
CLN are designed to resemble a synthetic bond or loan
The CLN/CLD is payable in full at maturity unless a Credit Event
affecting the Reference Entity occurs during the instrument’s life.
The coupon of the CLN/interest on CLD reflects the issuer’s
funding cost plus an amount to compensate for the credit risk of
the Reference Entity
If the Reference Entity suffers a Credit Event, the investor
receives either physical bonds or a cash amount equivalent to the
post-default market value of the physical bonds. The note/deposit
is then cancelled
CLN are normally issued by a Bank or a Special Purpose Vehicle
which holds some form of a cash collateral financed through
issuance of notes
CLN/CLD can be structured so as to generate an enhanced yield
or meet specific investor requirements
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Why “Window of opportunity” is important ?
Indicative Pricing of Inverse Floater
6.00000
Tenor 3 Year
5.00000
> 6.0% - 6s Implied THB
%
4.00000
28-Feb-02
3.00000
29-Jan-03
Tenor 3 Year
> 3.5%-6s Implied THB
2.00000
1.00000
0.00000
3MImp
6Mimp
1YR
2YR
Tenor
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3YR
4YR
5YR
Indicative Pricing for Floating Rate with Collar
6.00000
Tenor 5 Year
5.00000
> = Implied THB 3%, 5%
%
4.00000
28-Feb-02
3.00000
29-Jan-03
Tenor 5 Year
> Implied THB ???
2.00000
1.00000
0.00000
3MImp
6Mimp
1YR
2YR
Tenor
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3YR
4YR
5YR
Concerns over Structured Note
Issuer’s Risk
Market Risk of which benchmark has been “Set”
Principal Return
Tenor
Liquidity – Secondary Market ?
Investor’s knowledge
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Sensitivity
What is the impact of the value of individual transaction or
portfolio to the change of a certain percentage of
referencing benchmark ?
The impact of the change of the curve – Flat, Steep, and
Negative
Greeks – What is the change of the value of transaction or
portfolio over time ?
Sensitivity will help monitoring and better manage
portfolio’s return
Trigger Level is also important
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Valuation – Keys Concern
Principal guarantee VS Non-principal guarantee
Transferable VS Non-transferable
Mark-to-Market VS Accrual
Accounting Treatment
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Individual VS Portfolio Based
Investor may view return on
each specific investment
Is it efficient ?
100%
Fixed
100
50:50
Fixed :
Float
1/3:1/3:1/3
Fixed: Float:
Other
50
50
1/3
1/3
1/3
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Individual VS Portfolio Based
To Maximize return on investment
Portfolio Composite to match investment “Guide Lines”
Portfolio Composite to match investment “Objectives”
Derivatives can help providing “Alternatives”
What else are we concerned ?
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Sensitivity
What is the impact of the value of individual transaction or
portfolio to the change of a certain percentage of
referencing benchmark ?
The impact of the change of the curve – Flat, Steep, and
Negative
Greeks – What is the change of the value of transaction or
portfolio over time ?
Sensitivity will help monitoring and better manage
portfolio’s return
Trigger Level is also important
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Conclusion
Derivatives provides more alternatives for Investors while
issuer potentially achieve better cost of fund for term
liquidity
Window of opportunity is important
Alternatively, bank can use structured note (CLN) as the
tools to reduce counterparty risk or credit risk to the bank
by passing risk to end investor, buyer of CLN
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