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1 Structured Note and Funding Alternatives. 2 Agenda n Making of Structured Note n Risk/ Return n Concerns over Structured Note n Conclusion.

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Presentation on theme: "1 Structured Note and Funding Alternatives. 2 Agenda n Making of Structured Note n Risk/ Return n Concerns over Structured Note n Conclusion."— Presentation transcript:

1 1 Structured Note and Funding Alternatives

2 2 Agenda n Making of Structured Note n Risk/ Return n Concerns over Structured Note n Conclusion

3 3 Power of Derivatives n Structured Note = Debt Instrument + Derivatives n Provides more alternatives to meet with Supply & Demand n “ Tailor Made ” and “ Window of Opportunity ” Concept n Linear and Non-Linear payout n Principal guarantee and Non-Principal guarantee n Payout Participation

4 4 Making of Structured Note Bond/Note Issuer Investor Fixed or Floating Coupon Normal Fixed Income Note/ FRN Structured Note Structured Note Issuer Investor Structured Coupon

5 5 n 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 Making of Structured Note

6 6 Investor n 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. n 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

7 7 Interest Rate VS Instrument n Lower Interest Rate Expectation Fixed Rate n Higher Interest Rate ExpectationFloating Rate n Confidence that Interest will be lower Inverse Floater n Confidence that Interest will staysRange Accrual

8 8 Making of Structure Note - Issuer Issuers n By using Derivatives, issuers can match their funding need with their Assets n Potentially able to achieve cheaper cost of fund thru some niche investors ISSUERBond Asset THB Fixed Asset Structured Note Payout

9 9 Making of Structured Note - KBANK 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. Asset/ Loan Investor Structured Note Payout Fixed or Floating Payout

10 10 Basic Structure Investor Structured Note Payout THB THB – return on Asset THB Fixed/Floating Derivatives Loan/ Asset

11 11 Making of Structured Note - Example n Floating Rate Note With Collar n Inverse Floater n Callable Inverse Floater n Range Accrual Note n Quanto Note n SET Linked Note n Credit Linked Note/ Deposit n WTI Linked Note

12 12 Floating Rate With Collar 01%3%5%7% Interest % Return Collar

13 13 Floating Rate with Collar Implied THB with Collar THB THB Floating return on Asset THB IRO

14 14 Inverse Floater 01%3%5%7% Interest % Return Investor receives higher return when interest rate is lower

15 15 Inverse Floater Inverse Floater Note THB THB Floating return on Asset THB IRO THB interest rate Swap – Receive Fixed, Pay Float

16 16 Callable Inverse Floater n Investor receives higher return in year 1 while the Note can be called back by issuer at any of the interest payment date 01%3%5%7% Interest % Return 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%

17 17 Callable Inverse Floater Fixed Coupon Inverse Floater Coupon Callable Date Start Date Maturity Date

18 18 Callable Inverse Floater Inverse Floater Note THB THB Floating return on Asset THB CAP THB interest rate Swap – Receive Fixed, Pay Float THB Swaption

19 19 Range Accrual Note n Investor will receives higher return as long as index benchmark is in between pre-determined range n Investment return is subject to minimum of 0% n 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

20 20 Range Accrual Note 010%30%50%70% 100% Day in Range Return

21 21 Range Accrual Note n/N * i%, minimum 0% THB THB Floating return on Asset THB interest rate Swap – Receive Accrual Payout

22 22 SET Linked Note n Investor will receive higher return if SET Index move higher, other wise subject to minimum of 0% 01%3%5%7% SET Index Increase % Return CAP Return

23 23 SET Linked Note THB THB Floating return on Asset SETI Cap Spread

24 24 Credit Linked Note/ Deposit n CLN are designed to resemble a synthetic bond or loan n 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 n 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 n 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 n CLN/CLD can be structured so as to generate an enhanced yield or meet specific investor requirements

25 Why “ Window of opportunity ” is important ?

26 26 Indicative Pricing of Inverse Floater Tenor 3 Year > 3.5%-6s Implied THB Tenor 3 Year > 6.0% - 6s Implied THB

27 27 Indicative Pricing for Floating Rate with Collar Tenor 5 Year > Implied THB ??? Tenor 5 Year > = Implied THB 3%, 5%

28 28 Concerns over Structured Note n Issuer’s Risk n Market Risk of which benchmark has been “Set” n Principal Return n Tenor n Liquidity – Secondary Market ? n Investor’s knowledge

29 29 Sensitivity n What is the impact of the value of individual transaction or portfolio to the change of a certain percentage of referencing benchmark ? n The impact of the change of the curve – Flat, Steep, and Negative n Greeks – What is the change of the value of transaction or portfolio over time ? n Sensitivity will help monitoring and better manage portfolio ’ s return n Trigger Level is also important

30 30 Valuation – Keys Concern n Principal guarantee VS Non-principal guarantee n Transferable VS Non-transferable n Mark-to-Market VS Accrual n Accounting Treatment

31 31 Individual VS Portfolio Based % Fixed 50:50 Fixed : Float 50 1/3 1/3:1/3:1/3 Fixed: Float: Other n Investor may view return on each specific investment n Is it efficient ?

32 32 Individual VS Portfolio Based To Maximize return on investment n Portfolio Composite to match investment “ Guide Lines ” n Portfolio Composite to match investment “ Objectives ” n Derivatives can help providing “ Alternatives ” What else are we concerned ?

33 33 Sensitivity n What is the impact of the value of individual transaction or portfolio to the change of a certain percentage of referencing benchmark ? n The impact of the change of the curve – Flat, Steep, and Negative n Greeks – What is the change of the value of transaction or portfolio over time ? n Sensitivity will help monitoring and better manage portfolio ’ s return n Trigger Level is also important

34 34 Conclusion n Derivatives provides more alternatives for Investors while issuer potentially achieve better cost of fund for term liquidity n Window of opportunity is important n 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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