Yield notes part 3 – investing in attractive custom deals

Following part 2 in our yield note series, we want to highlight our capability to participate in custom structured yield note deals with attractive terms. We can tailor these custom yield note deals to include additional features and individual securities. We also tailor these deals with solid levels of principal and coupon protection and higher expected yields. Such investments allow us to drive portfolio returns outside of investments in traditional stocks and bonds.

One of the reason yields are typically higher for yield notes based on individual securities is that price movements on individual securities can be more volatile than for overall indices. That’s why our investment team performs fundamental company research to ensure that (A) any individual securities in a yield note are high quality companies with strong financial profiles, and (B) the terms of the custom yield note deal are attractive.

How we participate in attractive custom yield note deals

Today we want to demonstrate our ability to participate in attractive custom yield note deals through a structured yield note example that we are trading next week. We have locked in terms on this yield note and applicable investors will see it in their portfolios next week. As a reminder, not every investor will see every change reflected in their portfolio depending on their unique circumstances.

Key terms of the note:

Term: 5 years

Issuer: BNP

Underlying assets: Amazon, Google, Disney

Yield: 12.24%

Principal protection: 50%

Coupon protection: 50%

Coupon payments: Monthly

Callability: Non-call period of 1 year, Auto-callable monthly thereafter

This note also has a 'Memory' feature, which means that if an investor misses a coupon payment due an underlying asset falling in value below the coupon barrier, the next time the investor collects a coupon, they will also collect all missed coupon payments.

The note explained in basic terms

Investors receive a 12.24% annual return plus principal so long as the worst performing underlying asset (Amazon, Google, Disney) is not down by more than 50% over the five-year period between the issue date of the note and the final valuation date.

Coupons are paid monthly (so long as the worst performing underlying asset is not down by more than 50% from issue date on each monthly coupon observation date). The memory feature ensures that any missed coupons are collected so long as the worst performing underlying asset is not down by more than 50% at the end of the term. Yield notes are ranked as senior unsecured debt, behind only senior secured debt and deposits in the capital structure. 

After one year, the issuer (BNP Paribas) has the right to call the note away each month if all of the underlying indices are trading at higher levels compared to where they were trading on the issue date. When an issuer calls a note away, we reassess the investment universe and either allocate the capital into a new yield note, or a new opportunity with a stronger risk/reward profile at that point in time (like stocks). All payments of income and principal for structured notes that we own (including this example) are subject to the creditworthiness of the issuer. Our investment team only deals with banks with solid credit ratings. BNP is A+ rated at Fitch, A+ rated by S&P, and Aa3 rated at Moody’s. 

Amazon, Google and Disney are all high-quality companies with five-year price targets above where they are trading today. We do not anticipate that any of these companies will be trading more than 50% lower five years today (which is not to say it’s impossible). 12.24% is a strong annual return in current conditions, and we view the risk /reward on this trade as attractive.

By combining a fundamental assessment of company quality with a quantitative assessment of the terms of a deal, GoalVest drives portfolio returns by participating in select custom yield note investments where the terms of the deal are especially attractive.

For further information on how we use yield notes to drive return in our portfolios or on the mechanics of any yield notes, feel free to reach out with any additional questions or refer to our prior yield note articles part 1 and part 2.

Disclaimer
The information presented should not be considered personalized investment, financial, legal, or tax advice. This notification is not an offer to buy or sell, or a solicitation of any offer to buy or sell, any of the securities mentioned herein. Certain statements contained herein may constitute projections, forecasts, and other forward-looking statements, and are based primarily on assumptions applied to certain historical financial information. Certain information has been provided by third-party sources, and although believed to be reliable, it has not been independently verified, and its accuracy or completeness cannot be guaranteed. Any opinions, projections, forecasts, and forward-looking statements presented herein are valid as of the date of this document and are subject to change. Past performance is not indicative of future performance. Principal value and investment return will fluctuate. There are no implied guarantees or assurances that the target returns will be achieved, or objectives will be met. Future returns may differ significantly from past returns due to many different factors. Investments involve risk and the possibility of loss of principal. The values and performance numbers represented in this report reflect management fees. The values used in this report were obtained from sources believed to be reliable. Performance numbers were calculated by Black Diamond using the data provided by your custodian. Please consult your custodial statements for an official record of value.

The securities involve risks not associated with an investment in ordinary debt securities. Selected Risks Associated with any of these structures include: - Notes are not principal protected and investors can lose some or all their initial principal if the underlying asset falls below the Principal Barrier Level. - Contingent coupon payments. Investors may not receive periodic interest payments if the performance of the underlying asset falls below the Coupon Barrier Level. It is possible that investors will not receive any coupon payments over the life of the Note. - Potential for early redemption and reinvestment risk. Notes will be automatically called if the performance of the underlying asset is at or above the Initial Strike Price on the defined Observation Date. If called, investors may not be able to reinvest their proceeds in a product with a comparable coupon. - Returns are limited to the coupon payments, if any. Investors will not participate in any price appreciation of the underlying asset. Additionally, investors will not receive dividend payments generated by the underlying asset. - Limited secondary market. Notes should be considered buy-and-hold investments and investors should hold them to maturity. They are not traded on an exchange and there may be little to no secondary market available. - Issuer credit risk. Notes are senior, unsecured debt obligations of the issuer and all payments of income and principal are therefore subject to the creditworthiness of the issuer. - Complex investments. Notes may have complex features and may not be suitable for all investors.