Introduction to Structured Notes

April 16, 2015 / Knowledge Centre

A structured note is a product that is frequently offered to international investors, either by banks or by wealth managers. In this article we will explore what lies beneath this term ‘structured note’. As the name suggests, a structured note consists of several individual financial instruments which, combined together, form a ready ‘over-the-counter’ product.

The following is a broad overview of the basic characteristics of Structured Notes. Every single note however can be individually customized to meet the requirements of a particular audience.

Characteristics of Structured Notes

  • Represents a debt obligation of the issuing bank
  • Provides exposure to various asset classes via derivatives or options, like:
    • Equities
    • Commodities
    • Indices
    • Funds
  • Can provide full or partial capital guarantee
  • Tradable on secondary market

Who should consider Structured Notes?

Investors who require the following:

  • Above average yields
  • (Partial) protection from market fluctuation
  • Diversification into new asset classes and markets
  • Have a medium term investment horizon of between 2-5 years

What types of Structured Notes are common?

  • Phoenix Notes are designed to pay a monthly, quarterly or semi-annual coupon as long as the underlying assets to which the note is linked do not drop below the coupon barrier. These notes generally offer a lower yield than an Auto-callable note because Phoenix notes are designed to pay out on the coupon on a regular basis.
  • Auto-callable notes differ from Phoenix notes in that they don’t pay a regular coupon, but accumulate the coupon until the auto-call conditions are met. Upon hitting the auto-call conditions the note automatically stops, or calls – hence the name “auto-call”, and pays out the accumulated coupon(s) plus the originally invested capital.
  • Capital Protected notes are different to Auto-call and Phoenix notes, which carry an element of capital-risk, as these notes offer full return of capital at maturity no matter how the underlying assets perform. The potential yield that these types of notes can offer is generally much lower than Auto-call and Phoenix notes. This is because the full capital protection requirement leaves very little room for structuring yield enhancing elements.

Shoreline offers regular structured notes to clients via its many partners. If you would like to receive regular updates on structured notes all you need to do is to register on our mailing list. Contact us directly to discuss about investing in structured notes or if you wish to tailor a personal structured note.