Deutsche Bank’s capped BUyS linked to S&P 500 index provide enhanced return to cautious bulls

By Emma Trincal

New York, April 29 – Deutsche Bank AG, London Branch’s 0% capped buffered underlying securities due Nov. 2, 2017 linked to the S&P 500 index give investors a “balanced” risk-reward profile with sufficient downside protection to attract investors seeking to outperform the benchmark, said Tim Vile, structured products analyst at Future Value Consultants.

“It’s not a bad product. The leverage gives you a return of 10% a year. You still need to be bullish because there’s got to be enough movement to get you there. You need the index to be up about 7% a year, which is not as easy as it sounds. But at least the leverage allows you to outperform if the market generates muted returns,” said Vile.

The payout at maturity will be par plus 150% of any index gain, up to a maximum return of 14.25% to 16.5%, according to a 424B2 filing with the Securities and Exchange Commission.

Investors will receive par if the index falls by up to 10% and will lose 1% for every 1% decline beyond 10%.

To create his research report, Vile picked a cap of 15.375%, which is at the mid-point of the range.

Low market risk

Future Value Consultants measures risk, return and value using a variety of proprietary scores in order to compare a product to others. Notes are evaluated versus their peers but also against the “all product” category, which comprises products across all structure types recently rated by the research firm.

Future Value Consultants puts the notes in its leverage return category, which includes any note with an upside participation rate greater than 100%.

The risk is calculated by adding to components – market risk and credit risk. The sum of the two generates the “riskmap,” which measures on a scale of zero to 10 the risk associated with a product with 10 as the highest level of risk possible.

The notes show a 2.11 market riskmap against an average of 4.17 for the product type, according to Future Value Consultants’ research report.

“That’s pretty good, especially for a short-term product,” he said.

“The volatility of the benchmark is not very high at around 15%. There are much more volatile underlying assets out there.

“But it’s the buffer that really contributes to the low market risk. A 10% buffer, short tenor on the S&P is quite decent. You would expect to have a gearing on those terms. In fact, a gearing would have increased the cap.

“This note is really designed for investors who want to reduce risk without sacrificing too much return. It’s not very bullish because of the cap.”

Credit

At 0.51, the credit riskmap is just average compared to the 0.49 average score of leveraged notes, according to the report.

“It’s a short maturity, so we should see less credit risk. This has to do with the issuer’s creditworthiness,” he said.

The five-year credit default swap rate for Deutsche Bank is 154 basis points, according to Markit. U.S. banks right now are showing spreads of 100 bps or below.

Overall, the notes carry a level of risk that is below average.

The sum of the two risk components gives a 2.62 riskmap versus an average of 4.67 for the leverage return category.

Average risk-return

The risk-adjusted rating is less impressive and only average.

Future Value Consultants measures the risk-adjusted return with its return score. The return score is calculated based on the best among the five return scenarios, which for this particular product would be the bullish scenario.

The report shows a 7.23 return score, which is almost identical to the 7.20 average for similar products and better than the 6.58 average for all products.

“The risk-adjusted return is just average despite a low riskmap. Obviously the cap is hindering on the score. It’s not a low score, but it would have been much better with a higher cap,” he said.

The leverage return category includes every leveraged product – with or without a cap or a protection. Some of the product’s peers may not have a cap or may have longer durations, he explained. This may explain why the return score is not higher.

“With this product, the priority is probably on the defense. You get a good buffer. You still have a reasonable cap. But it’s more of a balanced product than a purely bullish play,” he said.

Price, overall scores

For each product, Future Value Consultants computes a price score that measures the value to the investor on a scale of zero to 10. This rating estimates the fees taken per annum. The higher the score, the lower the fees and the greater the value offered to the investor.

The notes carry an 8.10 price score versus an average of 7.51 for the product type.

“It’s very strong. Pricing is definitely good here,” he said.

The price score was notably high given the short maturity of the product. Short-dated notes do not score well on the price scale as the fees, which are calculated per annum, are spread out over a shorter amount of time.

“The issuer spent enough on the options to give investors several important features. It’s not the highest cap, but with compounding you still get 10%. You have the benefit of a buffer. It’s short-term.”

The overall score measures Future Value Consultants’ general opinion on the quality of a deal. The score is the average of the price score and the return score.

The overall score at 7.66 is slightly above the average of 7.36 for leverage notes, according to the report.

“We get a bit more than the average thanks to the price score. It’s a middle-of-the-road product, which may appeal to cautious investors with limited market expectations.”

Deutsche Bank Securities Inc. is the agent.

The notes will settle on Tuesday.

The Cusip number is 2515A1NT4.

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