Wells Fargo’s $4.09 million securities linked to iShares MSCI EM ETF seen as too long, pricey

By Emma Trincal

New York, June 23 – Wells Fargo & Co.’s $4.09 million of 0% market-linked securities with leveraged upside participation and contingent downside due Jan. 25, 2021 linked to the iShares MSCI Emerging Markets exchange-traded fund offer relatively good terms, but sources view the long duration and the cost as drawbacks.

If the fund return is positive, the payout at maturity will be par plus 122% of the gain, according to a 424B2 filing with the Securities and Exchange Commission.

Investors will receive par if the fund decreases by up to 30% and will share fully in losses if fund declines beyond the threshold price.

A market participant considered the long-term risk exposure associated with a volatile underlier.

“It’s somewhat interesting if you have a long view on emerging markets, but it’s a rather long term. And a 30% barrier on emerging markets, I don’t know if it’s deep enough for a seven-year to be comfortable in. I don’t think the upside leverage warrants that much risk,” this market participant said.

“If they gave you two-times, maybe. ... Although I’m not even sure, because the emerging markets are so volatile. In seven years, who knows what can happen? If it was on the S&P, the Russell or the Euro Stoxx, OK, you could look at the charts and see when was the last time you had a 30% drop and from that point, come up with good stats on whether it makes sense or not. But I don’t see it as very appealing on emerging markets, at least not on a seven-year.”

Steve Foldes, president of Foldes Financial Management LLC, said the uncapped leverage on the upside and the protection on the downside are at first glance attractive. But he would not consider the notes due to their length and cost. The distribution fee is 3%, according to the prospectus.

“The 122% participation is a good thing. A 30% barrier is nice. A seven-year note is not such a good thing. And a 3% fee is very high,” he said, adding that the “non-negotiable” part of the deal is its tenor.

“A seven-year for us is a killer. It’s a non-starter,” he said.

“Despite the fact that Wells Fargo is a fine institution, that they have perhaps the best CDS spreads in the U.S., holding up our clients’ money for so long is somewhat problematic.

“We like two-year notes. Sometimes, we stretch it to three years. But our clients are conservative. From the perspective of our investors’ sensitivity, seven years is a very long time for us.”

Good terms otherwise

Aside from the maturity and the fee, Foldes said that the upside participation and downside protection are satisfactory.

“The 1.22 times leverage is nice. Having no cap is nice too, although you would expect an uncapped return on a seven-year term. I don’t know how they would sell it otherwise,” he said.

“The 30% barrier is nice also, even though that type of buffer would have more weight on the S&P, which tends to be less volatile. We realize that this is not a buffer. A buffer would offer absolute protection. This is only a barrier, which may be breached, in which case you’re long the fund. But 30% is decent enough. Even with the more volatile emerging markets fund, we could live with that contingent buffer.

“What’s really a killer here is the long duration. On top of it, the 3% fee is very high. Anything we would do would be a reverse inquiry, but we would never pay anything close to 3%. Assuming that we would be able to negotiate the fee, the seven-year [term] would still not work.”

High standards

Foldes said that good structures are becoming less common due to the challenging pricing environment.

He understands the pricing limitations faced by the sellsider, he said, but he still wants to remain very selective when considering structured notes for his clients.

“In a perfect world, I would want a shorter-dated product, between two years and three years, with the same 30% buffer. We understand that it’s not going to happen, not in this environment, with volatility being as low as it is and banks’ funding spreads being where they are,” he said.

“But I still have high standards. We want large barriers with uncapped leveraged upside. It may be a dream, but that’s what we’re looking for.”

The notes (Cusip: 94986RUE9) priced June 18.

Wells Fargo Securities LLC was the agent.

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