Example structured note analysis
Below is a description of a typical Phoenix note. We have marked the important areas that are explained above:
Royal Bank of Canada – 4 years 14% Technology Phoenix Note
Start date: May 2012
Underlying stocks: Apple, Activision Blizzard, Intel Corp, United Technologies Corp and International Business Machines.
The Technology Phoenix Notes (the ‘Notes’) are designed for investors seeking regular Bonus Coupons (3.5% p/qtr.) compared to low deposit rates, and are moderately bullish equity markets over the medium term.
The Notes are a Phoenix structure linked to a basket of diversified Technology Stocks. The Notes will deliver a regular quarterly Bonus Coupon of 3.5% if All Stocks are at or above 75%of their initial levels. Providing an excellent opportunity for investors to benefit from strong regular bonus payments, even in bearish markets.
The Notes ‘Autocall’ or early redeem on the first quarterly period that all the Stocks are recorded as being at or above 100% of their Initial Levels. On Early Redemption the Notes return 100% of capital, plus the relevant 3.5% Bonus Coupon.
Even if the Notes do not early redeem, they contain a valuable protection feature for the investor. The Notes will return 100% of capital invested as long as none of the Stocks at the Final Valuation Date have fallen by more than 50% from their Initial Valuation Levels.
If any Stock has fallen by more than 50% at the Final Valuation Date, then the Final Redemption Amount will be equivalent to the performance of the Worst Performing Stock, and some capital will be lost.
Let’s translate this using the above terms we used and determine if this note offers good value:
Issuer: Royal Bank of Canada – Good bank
Type: Phoenix note as it states that there are regular bonus coupons paid out. – Good, regular income
Basket: Five technology stocks issued in a time technology was (and still is) performing well – acceptable
Coupon barrier: 75% of strike price – quite a high barrier, but the coupon is attractive – acceptable
Maturity barrier: 50% – Standard European barrier – good
Observation: Quarterly – Good
Observation type – Worst-of – Good
Memory Coupon – No – acceptable
This note was deemed to be acceptable for investment and yielded ten coupon payments of 3.5% each before calling early in late 2014. A total return of 35% was paid to investors in two and a half year.
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