Martin Lee @ Sg
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Macquarie MQ Yield Plus Notes

Someone sent me a copy of the pricing statement for Macquaire MQ Yield Plus Notes due 26 March 2010 and asked me for my comments.

The MQ Yield + is a 2-year structured note that provided a fixed coupon of 1.05% every half year with the chance of two additional variable interest payments if the Hang Seng Investment Index Fund – H Share Index ETF (HSI ETF) performed well.

Upon further reading, I realised that this “additional” variable interest only accounts to 0.05% per year, or a total of 0.10%. That means a cumulative interest payment of 4.3% for 2 years.

If the Hang Seng index was flat or down, the interest payment would be 4.2%. The principal is protected if held to maturity.

Why would anyone bother coming up with an structured note that offers a potential upside of only 0.1%?

If you look at the risk factors of this product, there are mainly two:

  1. The issuer risk.
  2. A clause called the hedging disruption event whereby the notes will be redeemed early and there will be a loss of capital.

As defined on page 13 on the pricing statement:

If a “Hedging Disruption” occurs at any time, the Issuer may, while the Hedging Disruption is continuing, having given at least two Scheduled Trading Days’ notice to Noteholders, redeem the Notes for an amount to be determined by the Calculation Agent (together with accrued interest (if any) accrued to the date of redemption) as being the value of the Notes following the occurrence of a Hedging Disruption (the “Hedging Disruption Redemption Value”) which will reflect the losses or costs of the Issuer that will be incurred under the then prevailing circumstances and which may not be the mark to market value of the Note.

A “Hedging Disruption” means that the Issuer is unable after using commercially reasonable efforts, to (i) acquire establish, re-establish, substitute, maintain, unwind or dispose of any transaction(s) or asset(s) it deems necessary to hedge the equity price risk of entering into a performance of its obligations with respect to the Notes or (ii) realise, recover or remit the proceeds of any such transaction(s) or asset(s).

If the Issuer redeems the Notes early as a result of a Hedging Disruption there is no guarantee that the Noteholders will receive the full Denomination Amount of the Notes upon redemption and in certain circumstances, the Hedging Disruption Redemption Value may even be zero.

Unfortunately, this is very vague and could mean just about anything. We do not know what are the conditions that would trigger such an event. Perhaps a fall in HSI beyond a certain level would trigger this but I can’t really tell without further information.

Update: Intheknow has clarified that the hedging disruption clause is a common clause found in many structured products. One likelihood of the clause being activated is when the issuer is at serious risk of going bust. 

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7 comments
Intheknow says 10 years ago

Hi All,

I AM OFFERING TO BUY JUBILEE SERIES 8, CITRINE NOTES, OR MACQUARIE YIELD PLUS NOTES (sorry I am not interested in Pinnacle 15/16 notes).

You must have the notes held in Standard Chartered or HSBC currently (since I only have accounts with them).

For more details, please contact:

[email protected]

I am currently checking with my bankers in both Standard Chartered and HSBC to confirm that this can be done. It will be a formal and official transaction where exchange of money and structured note is done simultaneously.

Please contact the above email address stating the amount that you wish to sell and we can discuss further.

I can guarantee that I will offer you a higher price than the current buy-back rate.

Thanks,
Intheknow

Reply
Intheknow says 10 years ago

Macquarie Bank looks safe for now. At least it’s still profitable and it’s credit ratings have been reaffirmed:

http://www.bloomberg.com/apps/news?pid=conewsstory&refer=conews&tkr=MQG%3AAU&sid=a2LhxblMlWNU

Reply
William tan says 10 years ago

Intheknow

Its difficult to say. even though Babcock & Brown’s the price now down to less than a dollar but its a much smaller company than Macquarie and Macquarie’s share price even though has not fallen through the floor is still in an extremely precarious position

All the structured products belong in the same mold, the product is structured the same way, including those that involves Lehman, and whether it involves Lehman or not doesn’t matter, its structured to explode sooner or later! All you need is to have a few risky companies in its fold like Macquarie or Babcock or any investment bank, let it run for a few more months, Mad, mutual assured destruction

Reply
Intheknow says 10 years ago

my comments apply to ALL series of Macquarie Yield notes. I believe that Macquarie has issued at least 6 series of notes.

1. 2.8%/3.1% notes
2. 2.8%/3.1% notes
3. 2.8%/3.1% notes
4. 2.55% notes
5. 2.1% notes
6. 2% notes

Reply
Intheknow says 10 years ago

Hi Lioninvestor,

Unfortunately, I would have to disagree with your final few paragraphs on the vagueness and risk of the Macquarie Yield Plus notes.

Let me demystify Macquarie Yield Plus.

Macquarie Yield Plus is very similar to Merrill Lynch Jubilee Series 8 notes. The investor is only taking on the risk of the Issuer (whether Macquarie Bank or Merrill Lynch) defaulting. It is a simple structured product with not much complex underlying workings.

The reference underlying, whether it is SIBOR staying within a range or HSI performing well, is only for determining the payment of the bonus coupon. You are right in asking what’s the point of having such a peanut bonus interest component of 0.x%. The main reason why there is the bonus interest component is to intentionally make the product a STRUCTURED PRODUCT rather than a plain fixed deposit.

By introducing such a ‘bonus interest’ component into the product, the product can be classified as a STRUCTURED PRODUCT, which makes it fall under senior unsecured liabilities of the issuer, rather than as a deposit liability. This also means that an investor of the STRUCTURED PRODUCT ranks below that of a fixed deposit holder in a liquidation scenario.

Now to the HEDGING DISRUPTION clause. This clause can be found in ALMOST every single structured products’ prospectus, if one is patient enough to flip through every page. This basically means that the issuer has the right to early terminate the entire arrangement if it is unable to conduct its regular course of business. To translate it to Macquarie Bank or Merrill Lynch, it would mean that its creditworthiness has deteriorated so badly until nobody wants to do business with them. IT HAS NOTHING TO DO WITH THE UNDERLYING: SIBOR or HSI.

So I repeat again. Even if the HSI drops by 80% tomorrow, there will not be a ‘hedging disruption event’ occuring. However, if Macquarie Bank is downgraded by Moody’s or S&P to say CCC+ (It’s single A now if I am not wrong) tomorrow, and everyone refuses to do business with Macquarie Bank, then yes, a ‘hedging disruption event’ may be declared. Thus, you can think of hedging disruption as happening when a Bank is about to fail.

However, my personal feel is that this is unlikely. Australian government has already stepped in to guarantee all Australian Bank deposits as well as their foreign borrowings (STRUCTURED NOTES ARE NOT GUARANTEED). It is unlikely that everybody would refuse to do business with Macquarie Bank. Macquarie Bank can always fall back on the big 4 Australian banks (ANZ, Westpac, NAB, and Commonwealth Bank of Australia).

Thus, my conclusion is Macquarie Yield Plus notes are as safe, I may even say they are safer, than Merrill Lynch Jubilee Series 8 notes.

As a gauge, there is a more dangerous institution called Babcock and Brown in Australia. If Babcock and Brown doesn’t fail, Macquarie Bank shouldn’t. Start worrying only after Babcock and Brown goes down (and if the Australia government doesn’t step in to save Babcock and Brown).

Reply
    lioninvestor says 10 years ago

    Thanks for the clarification on the hedging disruption term. The words are constructed in a way that they could mean just about anything. Why can’t they use simple layman language? 🙂

    Personally, I would be very cautious on any product that has such a term.

    On another note, the share price of both Mac and B & B have fallen significantly over the past year or so. Just a few weeks back, there were serious concerns that Mac might be in trouble. Of course, the risk is much lower now.

    Reply
      Intheknow says 10 years ago

      I don’t think any Australian FI will fail.

      the world has seen what happens when a major FI fails (i.e. Lehman) and I am sure they won’t let it happen again.

      US government hasn’t admitted it, but deep in their hearts, they knew that it was a MISTAKE to let Lehman fail.

      Australian government has plenty of bullets. They can easily save any of their major FIs. In my opinion, Macquarie is too big to fail.

      Cheers,
      Intheknow

      Reply
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