BNP Paribas offers exposure to clean energy with leveraged notes linked to basket of 15 stocks

By Emma Trincal

New York, March 9 – BNP Paribas’ 0% buffered return enhanced notes due March 31, 2021 linked to a basket of 15 stocks offer access to a theme-based investment in clean energy based on a recently created ranking from an independent advisory firm.

The basket includes stocks picked from a recently compiled list of environmentally friendly companies put together by research firm Clean Edge, Inc. earlier this month, according to a term sheet.

The equally weighted basket includes Apple Inc., Becton Dickinson and Co., Cisco Systems Inc., Equinix, Inc., General Motors Co., Goldman Sachs Group Inc., Intel Corp., Johnson & Johnson, Kohl’s Corp., Microsoft Corp., Procter & Gamble Co., Staples, Inc., Target Corp., Wal-Mart Stores Inc. and Whole Foods Market Inc.

The payout at maturity will be par plus 100% to 115% of any basket gain. Investors will receive par if the basket declines by 20% or less and will lose 1% for every 1% that the basket declines beyond 20%.

Clean energy

“It’s a theme-based investment,” an industry source said.

“If you look at the stock-picking process, the companies have been selected based on their mandate to reduce carbon footprint. But Clean Edge is mostly focused on positive filters. ... They want to identify companies that understand the need to transition to sustainable energy.”

Clean Edge, founded in 2000, is a research and advisory firm specializing in the clean-tech sector.

The basket was created from the Corporate Clean Energy Leaders universe, a ranking of 34 companies based on the corporations’ commitments to renewable energy. Clean Edge, which released the list on March 1, had no role in the selection of the basket components, which was done by BNP Paribas, according to the term sheet.

The top three companies in Clean Edge’s ranking are Wal-Mart, Apple and Autodesk, Inc.

Those companies on their website publicized some of their initiatives.

Apple for instance said last year that it wants to get 100% of its paper packaging from renewable sources.

Wal-Mart is using LED lighting and has implemented water efficiency operations.

Autodesk positions itself as a leader in sustainable design.

Dividends

BNP Paribas selected the 15 stocks in the basket using a set of market filters such as a market capitalization of at least $5 billion or a dividend yield of 1.5% or more as well as filters related to the average daily trading volume for the stocks and their related listed options.

The average yield on the basket is currently 3% based on Wednesday’s closing prices.

The low leverage range of the notes surprised some given the diversified underlying basket.

Among some of the reasons structurers may use baskets in notes is to reduce volatility, which cheapens the cost of call options. This in turn facilitates the use of leverage.

“You’re talking about a diversified basket of stocks which somebody has put together for a reason,” said a market participant.

“These are the top picks. If you think this basket can deliver good returns, it’s a way to outperform the S&P while still maintaining a decent level of protection."

Investors give up the 3% average yield for the benefits of the structure, he noted.

“You have to look at it in the context of not getting the basket dividends. You’re giving up 15% ... but you’re still getting a 20% protection.

“It helps you on the downside. It doesn’t help you as much on the upside unless you get some leverage kicking up, in which case it can help offset the loss of dividends.”

Leverage

The industry source noted that while the leverage is modest, or possibly non-existent, the upside is not capped, which makes the notes especially compelling for bullish investors.

“I don’t know why the pricing doesn’t give you more leverage. It could depend on a number of things,” he said.

“First, rates are still low.

“Then you have a concession of 3.25%, which gives you less to buy the options.

“There’s also a limited amount of stocks you can use from a pricing standpoint. In this case you want lower-volatility stocks and higher dividends in order to increase your leverage. But you have to play with a specific set of stocks. It’s not unlimited.

“The big picture is this note is designed for a particular type of investors. It’s a thematic investment.”

BNP Paribas is the agent.

The notes will price March 28 and settle March 31.

The Cusip number is 05579TMA1.

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