Transcript Structured Note - Practitioner's Views

Structured Note and Funding
Alternatives
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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%
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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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