You might probably have seen advertisements for the Merrill Lynch Jubilee Series 8 Notes recently.
(If you haven’t, you can download the product fact sheet at the link below:)
Merrill Lynch Jubilee Series 8 Notes Fact Sheet
The Jubilee Series 8 Notes promises 3.15% p.a. for a period of 2.5 years. It also offers “100% principal protection at maturity*“.
A 3 year government bond is currently giving only a yield of 1.86%, so this looks like a good deal.
But wait, we need to read the fine print first (Did you?).
It says:
The Notes are principal protected if held until the Maturity Date. However, redemption of the Notes at 100 percnt of the principal amount of the Notes is not guaranteed if the Note is disposed of prior to maturity, or the Note is redeemed early due to taxation or other reasons.
A lot of people will probably be thinking: “As long as I don’t sell it before maturity, I will get 100% of my principal back.”
Let’s read the finer print and disclaimer on the fact sheet.
The security for the Notes will comprise certain securities issued by Merrill Lynch and the swap arrangements relating to the Notes including the guarantee by Merill Lynch as the swap guarantor. In the event that Merrill Lynch is unable to make or procure payment of amounts due under the securities or the swap arrangements, Jubilee Global Finance Limited will be unable to make the corresponding payments due under the Notes and the recourse of investors is limited to the realisation of the securities and to the termination payment (if any) due to Jubilee Global Finance Limited under the swap arrangements.
Yes, the Notes are 100% principal protected if held to maturity.
But no, the decision as to whether to sell the Notes or not does not lie totally with you.
There are certain conditions whereby the notes can be redeemed by the issuer prior to maturity date. They are:
- There is an event of default under the Notes
- The securities backing up the notes are repaid early for any reason, for example because there is an event of default under the securities or for tax reasons
- The swap agreement is terminated early
- The Cayman Islands imposes taxes on the issuer or on payments under the Notes which the issuer is unable to avoid
When any of these events happens, there is a risk of significant loss of capital.
A look at the Jubilee Notes Pricing Statement shows the securities backing up the notes to be SGD-denominated notes issued by Merrill Lynch & Co., Inc under its US$110,000,000,000 Euro Medium Term Note Programme. As the Securities are unsecured, they represent long-term unsecured debt obligations of Merrill Lynch & Co., Inc.
Therefore, you are paid the extra yield by taking on the credit risk of Merrill Lynch. And the few other reasons listed above which might not be too exactly transparent. For example, what are the factors that will determine when the swap agreement be terminated? We don’t really know unless we take the trouble to read thoroughly the base prospectus and pricing statement.
The question is, are we being compensated sufficiently to take on all these risks?
You might want to read page 6-12 of the Jubilee Notes Pricing Statement to understand fully the risk factors involved in puchasing this product before deciding whether it is suitable for you. While it has been marketed aggressively as a “100% principal protected product upon maturity“, it certainly isn’t a principal protected product.