Fixed Income Structured Notes Informational Brochure

Transcription

1 Fixed Income Structured Notes Informational Brochure The PrinceRidge Group LLC

2 These materials were prepared exclusively for the benefit and internal use of the institutional client of The PrinceRidge Group LLC ( PrinceRidge ) to whom they were delivered (the Institution ). These materials are intended to assist in the marketing of the products described herein to PrinceRidge s institutional clients only and does not carry any right of publication or disclosure, in whole or in part, to any other party. This marketing document shall only be circulated or distributed by PrinceRidge and not by the Institution. Neither this presentation nor any of its contents may be disclosed or used for any other purpose without the prior written consent of PrinceRidge. Each recipient of these materials is encouraged to perform an independent analysis of the information and the product descriptions contained herein. Any opinions inadvertently provided by PrinceRidge regarding the financial products discussed herein shall constitute. PrinceRidge s judgment and should be regarded as indicative, preliminary and for illustrative and discussion purposes only. PrinceRidge makes no representation or warranty regarding the performance of any product or transaction discussed herein. Any Institution considering the purchase of any products discussed herein should receive and review such product s offering materials prior to any such transaction. This informational brochure is not intended, and should not be used, to replace any such offering materials. This presentation does not constitute an offer, agreement, solicitation or a commitment by any PrinceRidge entity or the Institution to enter into any transaction. Securities are offered through The PrinceRidge Group LLC, a broker-dealer registered with the United States Securities and Exchange Commission and a member of FINRA, SIPC, and NYSE. The PrinceRidge Group LLC is an affiliate of PrinceRidge Partners LLC, PrinceRidge Holdings LP, and PrinceRidge Capital LLC. References to PrinceRidge shall mean PrinceRidge Partners LLC, PrinceRidge Holdings LP, The PrinceRidge Group LLC, and PrinceRidge Capital LLC, and each of their respective affilates and subsidaries, which shall include each of their respective past, current, and future shareholders, members, directors, partners, control persons, managers, officers, employees, agents, and representatives. Non-securities products and services are offered through one of The PrinceRidge Group LLC affiliates. Securities: Are not FDIC Insured - Are Not Bank Guaranteed - May Lose Value - Are Not a Bank Deposit - Are Not a Condition to Any Banking Service or Activity - Are Not Insured by Any Federal Government Agency. PrinceRidge makes no representations as to the actual value which may be received in connection with a transaction in any financial product described herein or the legal, tax or accounting effects of consummating a transaction in any of the financial products described herein. The information in this presentation does not take into account the effects of a possible change in market conditions, which may have significant effects on the products discussed herein. Nothing in this presentation is intended to be a representation by PrinceRidge as to the current or future value, future revenue or overall success of any financial product purchased by the Institution or any of the Institution s clients. PrinceRidge does not provide any tax or investment advice herein. This presentation is not intended or written, and cannot be used, for the purpose of avoiding U.S. federal, state or local tax penalties. Each Institution should seek advice based on the Institution s particular circumstances from an independent tax advisor before purchasing any of the products discussed herein.

3 About PrinceRidge PrinceRidge is a financial services firm built upon extensive industry experience, professionalism, and integrity. The firm is client oriented, fixed income focused, and offers a variety of financial services to an institutional customer base. PrinceRidge is committed to employing quality professionals with significant industry experience, deep product knowledge, integrity, and entrepreneurial spirit.

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5 Investment Banking The PrinceRidge Investment Banking Group provides advisory and targeted financial solutions to banks and specialty finance companies. Corporate Finance Buy-side and Sell-side M&A Loan and bond underwriting Capital structure advisory Bond consents and exchanges Restructuring Loan amendments Real Estate & Structured Finance M&A advisory Capital structure Restructuring Portfolio analysis Structuring investment solutions Asset-Backed Securities Loan and bond underwriting Portfolio analysis Loan modifications, restructuring and recapitalizations advisory Capital structure analysis

6 Sales and Trading Product composition of the Corporate Credit and Equities Sales & Trading Group includes: Corporate Credit Investment Grade Securities High Yield Securities Distressed Securities Municipals Emerging Markets Performing and Non-Performing Loans Structured Notes - Linked Notes (Equity, Commodity, Currency, CPI) - Steep Notes - Reverse Convertibles - Non-Inversion Notes - Range Notes Equities Preferred Securities Reverse Convertibles

7 Product composition of the Structured Products Sales & Trading Group includes: Structured Products Commercial Mortgage Backed Securities Commercial Real Estate Loans Asset Backed Securities Residential Mortgage Backed Securities Residential Loans

8 Linked Notes A family of structured products that are linked to the performance of various equity indices, commodities, currencies, baskets and/or a combination of the above. Characteristics of Linked Notes Returns are based on the performance of the commodity, currency, index or basket to which a given bond or note is linked. At maturity the holder may receive a percentage of participation in underlying investments. The notes may be principal protected if held to maturity (with a few exceptions). Principal protected relates to the underlying investment, not the credit rating. Maturities vary, generally ranging from 1 to 10 years. Commodity Linked Note Example 1 7-year Gold CD 2 Issuer: Rating: Union Bank N/A Settle: 08/30/2010 Maturity: 08/30/2017 Underlying: London Bullion Market Assoc. Participation: 100% Coupon: At maturity Price: $100 All interest is paid at maturity. CD captures 100% in the upwards price movement of the index with a coupon cap at 65-75%. The index level is determined by Barclays Capital, Deutsche Bank, Societe General, and HSBC and is fixed twice a day. The LBMA is the London-based trade association that represents the wholesale over-the-counter market for gold and silver in London. Currency Linked Note Example 1 Issuer: Citibank Rating: A3/A Settle: 11/27/2009 Underlying: RUB, IDR, SNY, BRL, TWD, TRY, AUD ILS all equally weighted vs. USD Participation: 180% Principal Protected 3 : <100% Coupon: At maturity, no cap Price: $100 All interest is paid at maturity. This note is a basket of currencies of commodity exporting countries and represents a bullish view on the Russian Ruble, Indonesia Rupiah, Chinese Renminbi, Brazilian Real, Taiwanese Dollar, Turkish New Lira, Australian Dollar, and Israeli Shekal. Index Linked Note Example 1 15-year S&P 500 Range Accrual Issuer: Citibank Rating: A3/A Settle: 08/30/2010 Maturity: 08/30/2025 Underlying: S&P 500 Callable: 08/29/2013, quarterly thereafter Coupon: Y1: 8% Fixed Y2-15: 8% if S&P 500 > 82.5% of 1, (Initial Index Level) Price: $100 Holder receives 8% coupon for the first year. For the rest of the term, the holder receives an 8% coupon ONLY for the number of days SEP is above that level. 1. This structure may not be indicative of all structures and is intended for illustrative purposes only. The highlights of this structure do not contain all features of this product. For a full description of such features a potential investor should review the corresponding offering materials. 2. Certificates of Deposit are FDIC insured up to $250,000 currently and have an estate put feature % Principal protection is also available. However other Terms of the note would likely then be impacted.

9 CPI Linked Notes The Consumer Price Index The CPI was established by the U.S. Bureau of Labor Statistics as a measure of the average change over time in the prices paid by urban consumers for a market basket of consumer goods. The CPI is one of the most significant gauges of inflation in the United States. Included in the basket are such things as food, gasoline, housing, and medical care. Increases in the costs of such items can indicate a rise in the inflation rate. The CPI is also known as the Cost-of-Living Index and is published on a monthly basis by the Bureau of Labor Statistics of the U.S. Department of Labor. CPI Linked Notes CPI Linked Notes pay a coupon, usually on a monthly basis, but sometimes pay quarterly, or semi-annually. The coupon on a given CPI Linked Note can be a combination of a fixed rate and a floating rate. The floating rate component of a CPI Linked Note is typically based on a year over year comparison of the CPI and, depending on the structure of the given transaction, may be subject to a cap. The Consumer Price Index CPI Linked Note Example 1 Issuer: Morgan Stanley Rating: A2/A- Settle: 2/23/10 Maturity: 3/1/2020 Coupon: 5% to 9/1/10 CPI YOY +205BP. Max CPN=9% Price: Holder receives 5% to 9/1/10. The note then floats to 205% of the Consumer Price Index year over year with a cap of 9%. Source Bloomberg. 1. This structure may not be indicative of all structures and is intended for illustrative purposes only. The highlights of this structure do not contain all features of this product. For a full description of such features a potential investor should review the corresponding offering materials.

10 Range Notes A range note is an unsecured bond or note that is linked to a predetermined reference interest rate and pays a stated coupon (usually higher than market comparable) for as long as the range is not hit. The London Interbank Offered Rate (LIBOR) yield curve is the index formula that is generally used. Range Notes Range notes are a product designed for investors with a specific view on the future movement of the specified interest rate referenced in the range note. A range note will not pay a coupon for the number of days it is above the target range. London Interbank Offered Rate The London Interbank Offered Rate is fixed each morning at 11 a.m. London time, by the British Bankers Association (BBA). The rate is an average derived from 16 quotations provided by banks determined by the BBA, the four highest and lowest are then eliminated and an average of the remaining eight is calculated to arrive at the fix, Eurodollar Libor is calculated on an ACT/360 day count basis and settlement is two days thereafter. 1 Libor Range Note Example 2 Issuer: Barclays Rating: Aa3/AA- Settle: 03/05/2010 Maturity: 03/05/2029 Coupon: Y1: 7% Fixed; Y2-20: 7% if 3 month LIBOR <6.75% Callable: 03/05/2010, quarterly thereafter Price: $100 The outlook on this is that 3-month LIBOR remains below 6.75%. The holder receives 7% fixed coupon for the first year. If 3-month LIBOR remains below 6.75%, the holder will continue to receive a 7% coupon. In the event 3-month LIBOR rises above 6.75%, the holder will receive interest payments ONLY for the number of days 3 -month LIBOR is above that level. 1. Source Bloomberg. 2. This structure may not be indicative of all structures and is intended for illustrative purposes only. The highlights of this structure do not contain all features of this product. For a full description of such features a potential investor should review the corresponding offering materials.

11 Federal Funds Federal funds are unsecured loans of reserve balances at Federal Reserve Banks that depository institutions make to one another. Banking institutions keep reserve balances at Federal Reserve Banks to meet their reserve requirements and to clear financial transactions. Transactions in the federal funds market enable depository institutions with reserve balances in excess of reserve requirements to lend them, or sell as it is called by market participants, to institutions with reserve deficiencies. Federal Funds Member Banks may lend Federal Funds to one another on an overnight basis. Money the Federal Reserve uses to pay for its purchase of government securities. Funds to settle transactions in which there is no float. Federal Funds Rate In the United States, the federal funds rate is the interest rate at which private depository institutions (mostly banks) lend balances (federal funds) at the Federal Reserve to other depository institutions, usually overnight. LIBOR Fed Funds Chart: LIBOR and Fed Funds Move in Tandem Together Source Bloomberg

12 Reverse Convertible Securities A reverse convertible, sometimes called a reverse exchangeable, is a short-term investment linked to an underlying stock. These securities offer individual investors a predictable, steady stream of income due to the payment of a high coupon. At maturity, the investor will receive either 100% of the original investment amount or, if the value of the underlying stock falls, a predetermined number of shares of the underlying stock, in addition to the stated coupon payment. Important Features of Reverse Convertibles 1 Short-Term Investment Reverse convertibles are typically issued with maturities that range from three months to one year. High Coupon Typically issued with above market rate coupons. Predictable Income The coupon is paid regardless of whether the investor receives cash or shares of stock at maturity. Not Principal Protected At maturity, investors may receive securities worth less than their original investment amount. Suitability of Reverse Convertible Securities Reverse convertibles consist of a debt instrument and a put option. By purchasing a reverse convertible, the investor sells the issuer the right to deliver the underlying asset to the investor at some point in the future. At maturity, the investor could receive either cash or shares of the underlying stock. Reverse convertible investors should have the knowledge and experience in financial matters necessary to be capable of evaluating the risks of such a transaction, and be financially able to bear the risk of a loss of principal. In addition, because there can be no assurance that a secondary market will develop or be maintained, they are most suitable for investors who intend to purchase and hold them until maturity. Reverse convertibles may not be suitable for all investors due to the potential for loss of principal. Reverse Convertible Note Example 1 Issuer: Royal Bank of Canada Underlying: Arch Coal 6-month maturity Knock-in: 75% Downside: 25% Coupon: 14.5% Monthly pay Price: $ This structure may not be indicative of all structures and is intended for illustrative purposes only. The highlights of this structure do not contain all features of this product. For a full description of such features a potential investor should review the corresponding offering materials.

13 Reverse convertible securities may be issued with a variety of different structures. The Knock-In is a common structure that may be utilized to offer an investor a certain amount of downside protection. The investor will receive either 100% of the original investment amount or the shares of the underlying stock at maturity. In all cases, the investor receives the stated coupon during the holding period regardless of outcome, be it cash or stock at maturity. Knock-In Structure Scenarios Knock-In Structure 1 Initial Investment: $10,000, Coupon 15% Assume Initial Stock Price: $30 (Strike Price) Knock-In Level: $15 50% of the initial price (50% knock-in, 50% downside protection) Scenario 1 Cash at Maturity The stock closes at or above the $30 initial price (strike price) at maturity, regardless of whether the stock is traded below the $15 knock-in level (50% downside protection) during the life of investment. The holder receives cash principal and coupon interest. $30 $15 Knock-In-Level Also referred to as downside protection Initial Price Time Receive Cash Scenario 2 Cash at Maturity The stock closes below the $30 initial price (strike price), but has never traded at or below the $15 knockin level (50% downside protection). The holder will receive cash even though it traded and closed below the strike price, plus coupon interest. $30 $15 Knock-In-Level Also referred to as downside protection Initial Price Time Receive Cash Scenario 3 Stock at Maturity The stock closes below the $30 initial price (strike price) and is traded at or below the $15 knock-in level, 50% downside protection, at some time during the life of the investment. In this scenario, the investor will receive 333 shares of stock. The value of the shares is based on initial price of stock, and will be less than the $10,000 original investment amount, plus the coupon interest because the stock is closing below the strike price. $30 $15 Knock-In-Level Also referred to as downside protection Initial Price Time Receive Stock 1. This structure may not be indicative of all structures and is intended for illustrative purposes only. The highlights of this structure do not contain all features of this product. For a full description of such features a potential investor should review the corresponding offering materials.

14 Steep Notes and Non-Inversion Notes Constant Maturity Swaps (CMS) A constant maturity swap is a floating-for-floating interest rate swap, usually exchanging a LIBOR rate for a particular swap rate. Steep Notes A steep note is a bond that pays a stated coupon (that is typically higher than market comparable rates) for a specific period of time. Thereafter, the coupon is based on the difference in spread between two maturities on the CMS (Constant Maturity Swap) curve times a multiplier. Non-Inversion Notes A non-inversion note is a bond that pays a stated coupon (that is typically higher than market comparable) as long as the yield curve between two stated maturities on the CMS curve does not invert. The maturities vary from issue to issue. A non-inversion note will not pay a coupon for the number of days the curve is inverted. Steep-Note Example 1 Issuer Rating: Morgan Stanley A3/A Settle: 08/19/10 Maturity: 08/19/2030 Coupon: Y1: 12% Fixed Y2-20: 4x (30 CMS - 2 CMS -.25) Callable: Price: $100 Cap: 12% Floor: 0% 08/13/2013, quarterly thereafter This note expresses a bullish view on the steepness of the yield curve. The holder receives 12% for the first year. For the remainder of the term, the coupon floats to four times the difference of the 30 yr constant maturity swap minus the 2 yr constant maturity swap minus 25 basis points. Non-Inversion Note Example 1 Issuer AIG Rating: A3/A- Settle: 05/04/2007 Maturity: 05/04/2022 Coupon: Y1-2: 7% Fixed Y3-15: 7% if 30 CMS 2 CMS > 0 Callable: 05/04/2009, quarterly thereafter Price: $100 The holder receives 7% for the first year. As long as the curve does not invert, remaining either steep or flat, the holder will continue to receive a 7% coupon. If the curve inverts, the holder will not receive interest payments only for the number of days the curve is inverted. 1. This structure may not be indicative of all structures and is intended for illustrative purposes only. The highlights of this structure do not contain all features of this product. For a full description of such features a potential investor should review the corresponding offering materials.

15 Risk Factors All the products described in these materials have varying degrees of risk associated with them. Additionally, fees and expenses for these products may be high and some embedded costs can be difficult for investors to determine. Each prospective investor should review the offering materials related to a specific product to assess such risks and may want to consult with a financial advisor. However, some general risks include, but are not limited to, the following: Tax Risk: It is recommended that investors seek and receive independent tax advice before committing to the purchase of any of the products discussed herein. With rare exceptions, the return generated by all the structured notes and reverse convertible products mentioned in this brochure are subject to original issue discount tax treatment. PrinceRidge does not provide tax advice and therefore responsibility for any tax implications of investing in any of the products discussed herein rests entirely with the investor. Investors should note that the tax treatment may differ from jurisdiction to jurisdiction. Interest Risk: Products discussed herein may include features whereby the interest payable to note-holders is at risk. Investors should determine whether an investment in such a product is appropriate to their particular circumstances. Market Risk: Investors in any of the products discussed herein should have prior experience with products featuring embedded derivatives, or should take steps to familiarize themselves with these products. Various factors may be applicable to and influence the market value of the products discussed herein, including, but not limited to, the level and shape of the relevant yield curve(s), affecting the coupon levels in volatility in the underlying commodity, equity, index, etc. Changes to any of these factors, as well as the remaining life to maturity and the credit quality of the Issuer will affect secondary market prices. Finally, early redemption may subject the investor to significant loss of principal. Credit Risk: Investors in any of the products discussed herein are exposed to the credit risk of the Issuer. Any payment due on any of the products discussed herein is dependent on the Issuer s creditworthiness. The ratings reflect the independent opinion of the relevant rating agencies as to the safety of payments of principal and interest. These ratings are not a guarantee of credit quality. Liquidity and Early Sale Risk: The ability to transact in the secondary markets in any of the products discussed herein is not guaranteed. Additionally, some of these products may include a provision whereby the issuer can redeem the product early ( call risk ) which may impact an investor s return. Finally, if applicable, the fact that the issuing firm published research reports regarding the reference asset(s) which may or may not be relevant to the decision to purchase or sell the product being discussed.

16 Contact Information Armand R. Pastine Managing Director (646) Joseph A. Castelluccio Jr. Managing Director (646) Stephen F. Cocco Jr. Director (646) James J. Meehan Director (646)