Martin Lee @ Sg
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What Happened to my Lehman Minibonds?

Added: If you are a Lehman Minibond holder, you can read the latest update on your minibond at the link below:

After a long weekend, I’m back again with a discussion on one of my holdings, the Lehman Minibonds. This product looks similar to a normal bond except that it is linked to the credit ratings of a few reference entities. If you are not familiar with this product, here’s a recap of the product specifications. This is with reference to the minibond series 2, the one I’m vested in.

Product Summary

This product is designed for defensive investors seeking exposure to high grade assets that provide steady coupons and enhanced yields. Investors can gain exposure to the credit risks of the reference entities without directly holding the debt obligations of the reference entities and without involving any reference entity in the transaction.

Key Features

Tenor of 5.75 Years
Low minimum investment size of S$10,000 or US$5,000
Attractive quarterly coupon payout: 4.88%pa for SGD placement or 6.28%pa for USD placement
100% redemption at maturity

How It Works

The note is credit linked to a few reference entities, namely :

  • American Express Company
  • Bank of America Corp.
  • DBS Bank Ltd
  • HSBC Bank PLC
  • JP Morgan Chase & Co
  • Singapore Telecommunications Ltd
  • Standard Chartered Bank

Investors are at risk where one of the above reference entities experiences a default (termed as Credit Event”).

Where any of the reference entities experience a “credit event”, the Minibonds redeem early at the credit event redemption amount.

This credit event redemption amount is calculated based on the market value of the “defaulted” entity’s debt obligations after the Credit Event.

End of Summary

On first impression, the product looks like a pretty safe bet. After all, it appears very unlikely that any of the reference entities will go into any default. This is probably the impression most of us get when we look at the product brochure.

Unfortunately, that is only half the story. In actual fact, there are a few other events that will result in the notes being redeemed early with a potential of capital loss for investors. They are:

  1. Default on the underlying securities which back the notes.
  2. The swap arrangements terminating early.
  3. The issuer becomes, unexpectedly, subject to the taxation of Cayman Island, where it is based.

The third scenario is probably something remote while the second option is way too complex for us to go into any discussion for now. But let’s look at the first scenario for a moment.

What are the underlying securities? If you thought they are related to the reference entities, you are wrong. In actual fact, they have nothing to do with the reference entities.

More on this tomorrow.

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