Tan Kin Lian's Blog: Pinnacle Notes - do you know the risks?

Monday, July 16, 2007

Pinnacle Notes - do you know the risks?

The Pinnacle Notes offers an interset rate of 5.25% per annum, with the following disclaimer:

The notes are not principal protected. Payment of interest and repalyment of 100% of the principal amount at maturity is dependent upon, amongst other things, the occurence of a Credit Event, a Mandatory Redemption Event or if the issuer exercises its Issuer Call Option.

In such circumstances, you will lose all or substantially all of your investment in the Notes.

Please refer to the Prospectus for more details.

With these types of unclear risks, it is really worth while to invest in the Pinnacle notes? Will you be stuck for the next 6 years with a low return? How much will you lose, if any of the events happen? What is the chance of it happening?

How much commission is earned by the distributing banks? How much does the Arranger earn on the product? Are the small investors getting a fair return for the risk that they are shouldering?

These types of products are too complicated for me. I do not invest in them. I discourage my family members from investing in these products.

7 comments:

Calvin Ng said...: Past performance should be not based upon to judge future potential returns. Hence, i believe Mr. Tan's experience in the past may not lead to any conclusive negative impact right?; November 09, 2006 11:49 AM
Tan Kin Lian said...: The structured products have high hidden charges for the distributor and the product arranger.

The return to the investor is quite poor.

The bad xpeerience in the past will continue in the future, so long as the products are designed to make profit for the arranger, and be unfavourable to the investor.; November 09, 2006 8:14 PM
Anonymous said...: The risk of the notes is pegged to the credit worthiness of some 5 credit references of double A rating. Eg. UOB bank, Standchart and other financial entities of similar rating.
A credit event occurs should any one of the entities default. The recovery rate is about 40%, ie you get back 40% of your capital.
The risk to consider is or ask yourself can anyone of the entities default.? Eg. can UOB default? It would be terrible and it is not impossible. Consider the probability of that event happening. Almost near zero, just like asking yourself whether INCOME
would collapse. Again the answer is almost impossible.
The callablle feature kicks in after 1.5 years depending on the interest rate prevailing at that point in time.If it is called , capital plus some premium will be returned.; July 16, 2007 2:05 PM
Tan Kin Lian said...: The risk of 1 entity defaulting is small. But, when you have any 1 of 5 entitles failing, the risk increases by 5 times. Yes, it is still small, but it is not that small.

When it fails, you have to lose up to 40%. What do you get for this risk? Just 1% more a year? Is it worht the risk?

Most investors will be willing to give up 1% for the chance of gaining 40% (instead of earning 1% for the chance of losing 40%!)

As the investor does not know the chance, it is not worth taking. I am sure that the product issuer knows how to calculate better than the small investor!; July 16, 2007 2:44 PM
Anonymous said...: Anonymous,
If the risk is that small, why don't the issuer absorb the risk then. If it is that small, do not even take that at a precondition then.

Roger; July 18, 2007 12:16 AM
Anonymous said...: I am wondering if all the comments here are about the blind leading the blind? hahaha....

Roger,
Anyway, here is what I understand in simple terms. The issuer probably have already borrowed some money to the reference entity at a higher rate. So now, they issue the notes to you at a lower rate. Thus, in essence they get the difference without needing to fork out a single cent. Wouldn't it be wonderful if we could do something the same. free money without forking out a single cent!!!hehehehe......; July 31, 2007 6:38 PM
Anonymous said...: Kin Lian proven right with time. Hope doubting Anonymous had learnt an actual lesson by having bought the product.; November 15, 2008 8:39 PM