The First Casualties

In the past few months, the FTSE 100 Index reached a high of 7,674.56 and on March 23rd an end of day low of 4,993.89 – a high to low fall of almost 35% At the time of writing the Index is 23.84% down, year to date.

Whilst early surrender values of structured products reflect these falls it is important for structured product investors to focus on the end outcome, rather than the daily noise. Falls in the market today do not usually have a major effect upon the result of plans, which may not mature for a number of years. For auto-call / kick-out the market falls are likely to lead to a deferral of the possible maturity to a later date, when the potential return will be higher.

Unfortunately, however, sudden falls can inevitably impact upon the returns of structured products which are approaching a fixed, final maturity date. For many such plans, the fall in stock market now means it is below where it was at commencement of the investment.

By way of an example, the Société Générale UK Super Tracker Deposit Plan 2 was a deposit plan, offering the potential to return 4.15 times the rise in the FTSE 100 Index from the plan’s strike date, capped at a 41.5%. Only a month before this plan was due to mature it was forecast to return the maximum 41.5% interest payment; however, the subsequent fall in the FTSE 100 saw all the potential gain wiped out. However, given that this was a deposit-based plan it always had the surety of returning at least the original capital at maturity, which it did.

Another accelerated growth plan which matured during the worst possible conditions was the Reyker Securities European Supertracker Plan March 2014. This offered ten times the rise in the Euro Stoxx 50 Index, with returns capped at 70%. Again, this was on target to achieve the maximum gain but unfortunately the Euro Stoxx fell from 3,865.18 down to 2,454.08 in the space of a single month. This, however, was nowhere near severe enough to break the plan’s capital protection barrier, so despite the index being negative this plan still returned invested capital in full.

The returns on share linked plans are typically dictated by the worst performing share and the FOCUS Structured Solutions FTSE 4 Quarterly Income Plan March 2014 is one that fared very badly. The plan was linked to the prices of four: GlaxoSmithKline, HSBC, Vodafone, and Barclays. Although this plan contained a 50% European capital protection barrier, observed only at the end of the plan’s term, this was breached with Barclays share price falling to a level of 89.06 on the plan’s final observation date - a 61.47% fall over the term, resulting in an equivalent loss of capital. This loss was compensated in part by the income paid by the plan throughout the term which amounted to 49.5%.

The hardest hit maturity was again, a non-mainstream investment. As the name suggests the Meteor Crude Oil Kick Out Supertracker Plan March 2015, was linked to the price of a barrel of oil. Tragically this matured at close to the worst possible time resulting in a loss of almost 75%.

Many income plans have the income payments contingent on the underlying being at or above a specific percentage of the initial level, on each income observation date. This income qualification thresholds are typically set at between 60% and 80% of the initial level. As such, many are facing the prospect of no income payable until the FTSE 100, or other index to which they are linked, recovers from current depressed levels.

As things stand, we can expect there will be further maturities in the coming months returning just the original capital and a number of the more speculative, share-linked plans maturing with significant losses. However, thanks to the capital protection barriers still being some way down, its comforting to note that we are still unlikely to see any plans linked to mainstream indices mature at a loss.

All plan data is sourced from StructuredProductReview.com.