BNP’s notes on the Dow, Nasdaq and Russell offer 50% absolute return with deeper barrier

By Emma Trincal

New York, March 11 – BNP Paribas’ 0% dual directional notes due April 3, 2029 linked to the worst performing of the Dow Jones industrial average, the Nasdaq-100 index and the Russell 2000 index provide investors with an unusual tradeoff – half of the absolute return participation for better terms, which may include a deeper barrier, more leverage, and the absolute return feature itself, an adviser said.

At maturity, the payout will be par plus 175% if the worst performing index closes at or above its initial level, according to a term sheet.

If the worst performing index closes below its initial price but at or above the barrier level, 60% of its initial level, the payout will be par plus 50% of the absolute value of the worst performing index.

Otherwise, investors will be exposed to the loss of the worst performing index from its initial level.

Half absolute

“That’s unique. I like it. I haven’t really seen the 50% participation on the absolute return,” said Ken Nuttall, chief investment officer of BlackDiamond Wealth Management.

He noted that unlike most worst of three underlying indexes, this one did not include the S&P 500 index.

“It doesn’t bother me. The S&P is more diversified. I would prefer to have it from a performance standpoint, but it’s a worst-of, so it’s not really an issue,” he said.

What was “unique” about the structure was the depth of the barrier made possible by giving investors half of the absolute return within the protected range.

“Normally, a 40% protection would be useless on a five year. I would usually go with a 20% barrier. But here you’re not overpaying because you’re getting 50% down,” he said.

Having no cap on a five-year leveraged note was to be expected. Most of the leveraged notes he recently saw had such characteristics. One relevant way to compare notes from an issuer to another was the amount of leverage.

“From what I’ve seen, the 175% leverage is quite nice,” he said.

“This is a good one.”

Similar deals

Nuttall looked at some comparable five-year uncapped leveraged note offerings set to price by the end of the month.

Morgan Stanley Finance LLC planned one based on the Nasdaq-100 index, Russell 2000 index and Dow Jones average industrial with four times leverage and a 60% barrier.

“These are the same underliers. It has no absolute return. But the 4x leverage is impressive,” he said.

BNP Paribas planned another deal similar to the first one. The terms and underliers were the same except for the barrier, set at 70%.

“This one doesn’t have any absolute return feature either. And the barrier is not as robust,” he said.

“It was commissionable.”

The fee on the term sheet is 3.25%.

He mentioned two other offerings incorporating the S&P 500 index in the worst-of.

Morgan Stanley planned notes linked to the worst performing of the Dow Jones industrial average, the Russell 2000 index and the S&P 500 index. The leverage will be between 135% and 150% and the barrier at maturity will be 50%.

Separately, JPMorgan Chase Financial Co. LLC will price 0% uncapped accelerated barrier notes tied to the least performing of the Nasdaq-100 index, the Russell 2000 index and the S&P 500 index with at least 160% leverage and a 70% downside barrier.

“Those deals are not bad. But none of them really compete with the 50% absolute return and 175% leverage from BNP except maybe the Morgan Stanley one with 4x. Overall, the barriers are not as good and there is no absolute return.

“So I think the BNP one with the 50% absolute return is pretty nice,” he said.

Too long

Scott Cramer, president of Cramer & Rauchegger, said the downside payout was attractive. But he would not pick the notes for his clients.

“What I don’t like is the five-year,” he said.

“The reason people buy structured notes is for the protection.

“It has a lot of protection. And you still make money on the downside. So that’s the good stuff.

“But I don’t know how excited I am. It’s a five-year and it’s a worst-of.”

Cramer said he usually avoids worst-of structures, although in this note the three underliers were highly correlated.

“I still think it’s a note you could do on your own.

“But I have to admit it has an adequate amount of protection and the absolute return makes it attractive.

“For somebody willing to tie up their money for a long time this would work reasonably well under all circumstances.

“It’s the illiquidity that bothers me,” he said.

BNP Paribas Securities Corp. is the agent.

The notes will be guaranteed by BNP Paribas, New York Branch.

The notes will price on March 28 and settle on April 3.

The Cusip number is 05612CMT6.

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