Merrill launches Singapore-targeted retail derivative

Merrill Lynch sells a credit-linked note to Singapore retail investors.
Merrill Lynch is launching the first principal protected credit-linked note available to retail investors in Singapore. The Jubilee LinkGain Note is a retail-oriented spin on an investment idea that already exists for private banks and high-net-worth clients. It is aimed at investors looking to diversify away from traditional savings products such as fixed deposits or endowment plans.

An investor will do well provided the credit environment remains benign over the next 10 years. Volatility would mean they still get their money back, after 10 years, which would represent a loss against inflation.

ôWe believe that the local market is ready to embrace higher yielding credit-linked investments with the safety of principal protection,ö says Singapore-based Tay Li-Choo, vice president at the bank's investor client group for debt markets in Asia Pacific.

The notes are denominated in both US and Singapore dollars, with minimum investments of $5,000 and S$10,000 respectively. Both tranches will mature in March 2017, more than 10 years from now.

The notes have an interest coupon paid at maturity of 200% on the US dollar note and 125% on the Singapore dollar note. If there are no credit events in the portfolio, the full interest coupon will be paid. In other words, if no credit events occur before maturity an investor in the Singapore dollar denominated note will receive a total return of S$22,500, including principal.

On the flip side, if credits within the portfolio experience an event, the interest coupon will be lower. For one credit event, the interest coupon for Singapore dollar investors will drop to 107.2% upon maturity, while if six events occur, a coupon of 17.9% plus principal will be paid on maturity. Should seven or more credit events happen before maturity, no interest coupon will be paid and investors will only receive their principal back. Investors therefore are betting that the global credit markets will be stable for the next decade.

In the past similar products have been primarily targeted at the private banking sector in Singapore. Although the payments are similar, the portfolio would typically be different for private banking investors and likely require a significantly larger investment.

ôThere are a number of credit products in Singapore and investors are now becoming more aware of them as a less volatile and suitable asset class,ö says Conan Hales, vice president, global structured credit products at Merrill Lynch in Tokyo.

According to Merrill Lynch, the notes are credit linked to a reference portfolio of 135 investment-grade reference entities. All reference entities are rated by MoodyÆs and Standard and PoorÆs and cover 19 industries, with a particular focus on sectors like telecommunications, utilities, publishing and financial institutions.

The reference entities come from Europe, North America and Asia Pacific, including internationally recognized names such as British Telecom, The Gap and Volkswagon. Asia PacificÆs contribution to the portfolio includes Hutchison Whampoa, Kookmin Bank and Qantas Airlines, as well as sovereign credits from the Kingdom of Thailand and the Republic of Korea.

In Singapore, the notes will be distributed by ABN AMRO, Citibank, CIMB-GK Securities, DMG & Partners Securities, Kim Eng Securities, OCBC Securities Private and UOB Kay Hian Private. The public offer for Merrill LynchÆs principal protected notes began on 20 November and is expected to close on 13 December. The firm has set the issue date at 28 December.

¬ Haymarket Media Limited. All rights reserved.
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