Yield notes – Attracting custom deals (part 3)

Following part 2 in our yield note series, we want to highlight our capability to participate in custom structured yield note deals with attractive terms. We can tailor these custom yield note deals to include additional features and individual securities. We also tailor these deals with solid levels of principal and coupon protection and higher expected yields. Such investments allow us to drive portfolio returns outside of investments in traditional stocks and bonds.

One of the reason yields are typically higher for yield notes based on individual securities is that price movements on individual securities can be more volatile than for overall indices. That’s why our investment team performs fundamental company research to ensure that (A) any individual securities in a yield note are high quality companies with strong financial profiles, and (B) the terms of the custom yield note deal are attractive.

HOW WE PARTICIPATE IN ATTRACTIVe CUSTOM YIELD NOTE DEALS

Today we want to demonstrate our ability to participate in attractive custom yield note deals through a structured yield note example that we are trading next week. We have locked in terms on this yield note and applicable investors will see it in their portfolios next week. As a reminder, not every investor will see every change reflected in their portfolio depending on their unique circumstances.

KEY TERMS OF THE NOTE :

• Principal protection: 50%

• Coupon protection: 50%

• Coupon payment: Monthly

• Callability: Non-call period
of 1 year, auto-callable monthly
  thereafter

• Term: 5 years

• Issuer : BNP

• Underlying assets: Amazon, Google, Disney

• Yield: 12,24%

This note also has a 'Memory' feature, which means that if an investor misses a coupon payment due an underlying asset falling in value below the coupon barrier, the next time the investor collects a coupon, they will also collect all missed coupon payments.

The note explained in basic terms

Investors receive a 12.24% annual return plus principal so long as the worst performing underlying asset (Amazon, Google, Disney) is not down by more than 50% over the five-year period between the issue date of the note and the final valuation date.
Coupons are paid monthly (so long as the worst performing underlying asset is not down by more than 50% from issue date on each monthly coupon observation date). The memory feature ensures that any missed coupons are collected so long as the worst performing underlying asset is not down by more than 50% at the end of the term. Yield notes are ranked as senior unsecured debt, behind only senior secured debt and deposits in the capital structure. 
After one year, the issuer (BNP Paribas) has the right to call the note away each month if all of the underlying indices are trading at higher levels compared to where they were trading on the issue date. When an issuer calls a note away, we reassess the investment universe and either allocate the capital into a new yield note, or a new opportunity with a stronger risk/reward profile at that point in time (like stocks). All payments of income and principal for structured notes that we own (including this example) are subject to the creditworthiness of the issuer. Our investment team only deals with banks with solid credit ratings. BNP is A+ rated at Fitch, A+ rated by S&P, and Aa3 rated at Moody’s. 
Amazon, Google and Disney are all high-quality companies with five-year price targets above where they are trading today. We do not anticipate that any of these companies will be trading more than 50% lower five years today (which is not to say it’s impossible). 12.24% is a strong annual return in current conditions, and we view the risk /reward on this trade as attractive.
 
By combining a fundamental assessment of company quality with a quantitative assessment of the terms of a deal, GoalVest drives portfolio returns by participating in select custom yield note investments where the terms of the deal are especially attractive.
For further information on how we use yield notes to drive return in our portfolios or on the mechanics of any yield notes, feel free to reach out with any additional questions or refer to our prior yield note articles part 1 and part 2.