Same structure, different risks and rewards: issuers offer buffered notes linked to S&P 500

By Emma Trincal

New York, Sept. 18 - Several issuers have announced buffered notes linked to the S&P 500 index over the past few days, but despite the similar structure, the products come in slightly different flavors reflecting different risk profiles in regard to the downside, said structured products analyst Suzi Hampson at Future Value Consultants.

Looking at offerings announced this month by JP Morgan Chase & Co., Deutsche Bank AG and Goldman Sachs Group Inc., Hampson said: "The S&P 500 is the most popular index and most providers issue a number of products linked to this index.

"It's always interesting, however, to look at the slight differences in the potential gains."

More protection

Hampson said that the notes proposed by Deutsche Bank and JP Morgan are the most similar in structure.

Deutsche Bank announced one-year buffered return enhanced notes linked to the S&P 500.

On the upside, the securities offer a potential accelerated return via a 200% participation rate subject to 15.9% cap in addition to the principal amount.

By comparison, the JP Morgan buffered return enhanced notes - also with a one-year maturity and the same two-to-one leverage - are subject to a lower cap of 13%.

In both cases, the payout at maturity will be par plus double any gain in the index, up to the cap.

"These terms on the upside are fairly similar," said Hampson. "But those deals are slightly different with regard to the downside."

The buffer is 10% with the Deutsche's notes and 15% with the JP Morgan structure. Hence, the principal is not protected at maturity if the index falls by more than 15% with the JP Morgan offering and there is no protection if the underlying falls by more than 10%, in the case of the Deutsche structure.

"With its 15% buffer, JP Morgan offers more protection," said Hampson.

Another factor makes the JP Morgan deal more conservative due to a difference in the downside participation rates, she said. Investors will lose 1.1111% for each 1% decline beyond the buffer with the Deutsche notes; with the JP Morgan deal, there will be a 1% loss only for each point of decline beyond the buffer.

Big gap in caps

On the upside, the difference of 3% between the two caps - 13% versus 15.9% - reflects the fact that JP Morgan offers more downside protection than Deutsche Bank in these respective offerings, Hampson said.

"If you're pretty bullish, you may want to go for the Deutsche Bank notes given the potentially higher returns," she added. "The difference in caps is quite considerable.

"But it all comes down to investors' choices. Different issuers issue different products that are designed to fit different clients' needs."

Both series of notes offer similar ratings on Future Value's assessment scale, said Hampson.

The JP Morgan securities have an overall rating of 7.82 on a scale of zero to 10, which, according to Future Value's analysis, indicates an elevated expected risk/return ratio. For Deutsche's product, the overall rating is 7.69. The difference between the two structures is more visible when one looks at the riskmap ratio, which the firm produces as a tool to measure risk on a scale of zero to 10 as well. The riskmap is 3.89 for the Deutsche Bank product and 3.03 with the JP Morgan notes.

"This simply reflects the fact that you have more downside protection with the JP Morgan notes," Hampson said.

Goldman differs

Hampson looked at another deal - this one by Goldman Sachs and called Buffered Equity Index-Linked Notes Linked to the S&P 500 index - and said that although the structure is fairly similar to the two prior deals, some "slight differences" are worth paying attention to.

Here again, the notes are linked to the S&P 500; and they are buffered and capped.

Investors will receive par if the index declines by 20% or less and will lose 1.25% for every 1% that the index declines beyond 20%. The cap is to be set between 10.5% and 12%. The participation rate is 100%, which means no enhanced return.

The main difference with the two other deals, said Hampson, is the absence of leverage - the participation rate is 100% and not 200%. The second notable difference is the bigger buffer at 20%.

"At first I was surprised, because with no leverage, I would have expected a higher cap," said Hampson. "But I think the reason the cap is lower is because the [greater] buffer increases the level of protection. And with an index like the S%P 500 that is so volatile, downside protection is quite valuable."

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.