BNP Paribas’ dual directional buffered notes on S&P 500 seen as slightly bearish

By Emma Trincal

New York, Dec. 22 – BNP Paribas’ dual directional buffered notes due Dec. 28, 2026 linked to the S&P 500 index would be more appealing if the stock market dropped than if it rose, leading advisers to regard the structure as mainly bearish.

If the index gains, the payout at maturity will be par plus 300% of the return of the index capped at par plus 24%.

The payout will be par plus the absolute value of the index return if the index declines but by no more than the 20% buffer.

Investors will lose 1% for every 1% that the index declines beyond the buffer.

Bearish bias

“If the market goes sideways for three years, it’s a good deal,” said Kirk Chisholm, wealth manager and principal at Innovative Advisory Group.

“It doesn’t take into account a big sell-off though.”

The notes may be adapted to a slightly bearish market. But Chisholm’s outlook was more pessimistic.

The buffer was an advantage. But it would not match the benefits of a full protection.

Deep sell-off

“I prefer having a buffer than a barrier, for sure. But if the market is down 60%, it’s not going to do much for you,” he said.

In his example, investors would outperform the index by 20% but still incur a 40% loss.

“When prices drop that much, it makes little difference,” he said.

Investors appreciate the hard protection when losses are contained, not during a severe bear market, he said.

“Anyone who suffers a loss of more than 20% is not going to be happy. I expect a big sell-off, a drop much bigger than 20%. So, I don’t think the buffer is going to be that useful,” he said.

Forecasting the beginning of the market downturn was challenging for investors.

“We’re not in a normal environment. But it’s hard to make predictions. Everybody is predicting a recession next year, but people have been making that call for a long time.

“The market is due for a big pullback,” he said. “But nobody knows when and how.”

The right bet

The upside return was modest although it depended on the market view one held.

“If the market is flat, it’s fine,” he said.

The 24% cap over the period is the equivalent of an annualized compounded basis of 7.43%.

“Again, it all depends on your outlook. If the market is flat, it’s great. If it’s up a little, it’s OK. If it’s down but not down by more than 20%, it’s great,” he said.

Chisholm said some aspects of the notes were positive as the structure was consistent with a particular view.

“There are good parts in it,” he said.

“It’s an attractive note if you see the market bouncing around sideways for the next three years, which it certainly could.

“The probabilities are reasonable to expect that.”

Creditworthiness

Another financial adviser said the notes were almost too bearish.

“I have no problem with BNP. They have tight CDS spreads. The note is linked to the S&P alone, so we don’t have to worry about a worst-of. The term is fine. To me, three years is relatively short,” he said.

BNP Paribas’ five-year credit default swap rates are 52 basis points, according to S&P Global Market Intelligence. These levels are tighter than the big U.S. banks whose spreads range from 71 bps to 80 at the exception of JPMorgan’s 51 bps.

But this adviser was not satisfied with the upside potential.

“I’m not a huge fan of caps. Inevitably the cap comes back to bite you. I want to get equity-like returns, which is about 10% a year, at least. The three times leverage is great, but I’m capped 7.5% per year compounded,” he said.

Likely drag

Looking back at three-year rolling periods on the S&P 500 index over the past 75 years, he found that the chances for the index to be over the 24% cap were 57.2%.

“You will underperform almost 60% of the time.

“The good news is that you’ll outperform the market at just about any point below that 24% cap,” he said.

On the upside, the outperformance zone below the cap was attributable to the leverage, he said.

On the downside, the combination of a buffer and absolute return enabled the excess return over the index.

“I’m not used to seeing absolute return with buffers. Very often, it comes with a barrier. So, this is very good,” he said.

For bears only

But the chances of “being capped out,” were too high, he added.

“This note is catering to someone who is very bearish.

“The rationale is simple: we had a big runup so now we’re due for a big pullback. If that’s your view, this note is right for you. It’s a good fit because you have the absolute return and the buffering in place.

“If the note was built for somebody with a very pessimistic view, they did a very good job.

“But I guess I’m not that negative. So, I would take a pass,” he said.

BNP Paribas Securities Corp. is the agent.

The notes will settle on Dec. 26.

The Cusip number is 05611L2F9.

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