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Agenda
Equity-linked Debt Structures
SUNs & other ELNs
Full and Partial Principal Protection ELNs from Issuers and Investors Perspectives Product Structuring Tax Design Considerations Examples of ELN Structures
SIGNs GROIs MIPS
Copyright 1998-2006 Investment Analytics Equity Linked Debt Slide: 2
Equity Swap
Call
Floor Warrants SCORES
OTM Call
DECS PRIDES
Call Spread
PENS SUPERS GROIS Convertibles Collar
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=
DEBT INSTRUMENT TERM : 3 - 8 YEARS COUPON: LOW OR ZERO ISSUER: A-RATED
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Debt Component:
Principal Protected:
Principal fully guaranteed
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AKA:
SUN - Super Upside Note MITTS - Market Index Target-Term Securities (Merrill) SMART - Stock Market annual Reset Term notes SIRS - Stock Index Return Securities (Paine Webber) SUPER - Structured Upside Participating Equity Receipt
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% Return
110%
0%
ote cte d
% Return
110%
rti all y
Pa
Pr
ted tec ro
0%
Investor
Single transaction achieves debt & equity exposure Optionality can be difficult/expensive to replicate FDIC Insured (CDs)
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Product Structuring
Available for Option Component . . . Cost of 5 Year Call Option . . . $15 $10
$100 $15
5 YEAR NOTE
Copyright 1998-2006 Investment Analytics Equity Linked Debt Slide: 10
Partially Protected
Less than 90% principal is guaranteed Issue not bifurcated Taxed only on excess of original price, when and if paid
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Institutional Factors
Securities Laws
ELNs
Issuers have inventory of shelf registered MTNs, including ELNs Others individually SEC registered State Blue Sky law compliance is necessary
Participation CDs
Exempt from SEA 1933 registration requirements Exempt from Blue sky requirements in many states Authority from banking regulator required
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ELNs vs CDs
SEC registration & Blue Sky Secondary Trading
ELNs
Yes Yes
CDs
No Not allowed to sell or unwind Yes Banks
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No Corporate, Sovereign
Equity Linked Debt
Questions
What is the maximum participation you could offer? How much of a turn did Rep. Austria make in the original offering (100% participation)?
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Method:
Value the straight debt (use PRICE fn) Cost the call option Work out the participation %
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Participation Percentage
(Residual % / Option % = 28.72% / 24.57%)
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Method:
Option
Need to find appropriate option strike X: 90 + Participation % x (SP500 - X) = 100 Use trial & error
Participation Percentage:
[Residual % + (1 - Protection %)] / Option %
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SIGNS - Re-Engineered
Protection Strike 90% 599.35 80% 566.00 Note Participation: Option % 27.55% 29.90% Participation % 140.5% 162.9%
140.5%
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Bond Value
CAC-40 Index
175%
Equity Linked Debt
200%
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Parent Co.
INVESTORS
ON-LENDS PROCEEDS
Offshore Vehicle
PURCHASE MIPS
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MIPS: Benefits
Subs interest income tax free No withholding tax on MIPS dividends Parents interest payments fully deductible Corp. raises equity finance which:
Avoids existing bond covenants Pays tax-deductible dividends Avoids equity dilution
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Convertible MIPS
MIP Structures
MIPS that are convertible into common stock of primary issuer Sub/Trust uses MIP proceeds to buy convertible debentures in parent Parent entitled to deduct interest as before
Typical Structure
$50 Par value 30 year maturity 5 year call protection Conversion premium 20% - 25% Yield advantage 4% - 7% over common stock
Copyright 1998-2006 Investment Analytics Equity Linked Debt Slide: 24
TOPS
Trust Originated Preferred Securities (Merrill)
TIPS: Trust Issued Preferred Securities (Bear)
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Method
Similar to SIGNS lab, except two strikes to set
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Debt
Partially or fully protected Taxation issue
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