Monday, September 29, 2008

Experience of investor (2)

Hello Mr Tan:

Please find the attachments that bank X sent to me when they sold me the Minibonds Series 2 and 3. I note the following:

1. These investments are For defensive investors seeking exposure to high grade assets that provide steady & enhanced yields
2. Product Summary - 100% money back at maturity
3. Benefits of MiniBonds - Low risk and easy to understand
4. Benefits of MiniBonds - High quality and low risk entities have been selected
5. Risk to Investor - Investors are at risk where one of the selected entities experiences a Credit Event. No mention was made on risk of the issuer Lehman Brothers. I was also not told Lehman Brothers swap the fund with another counterparty to exchange the risk of the underlying stocks, and that if Lehman are bankrupt, they can default on the swap payment.

Clearly the above is misrepresentation by the bank! Based on these supporting documents, can I go after the bank for my money? After all, they promised 100% money back!! Your advice will be appreciated, thank you!

You can lodge a complaint with the CEO of the Bank and take it later to FiDREC (


Anonymous said...

Below is an article from Business Times dated 23/08/06 on Minibond and Pinnacle Notes:

Business Times

What are structured notes?

IF YOU are like most Singaporeans, you’d be attracted to products offering a high yield or interest rate. But you may be taking on more credit risk than you bargained for.

Two new structured notes - launched separately by Lehman Brothers and Morgan Stanley - hit the shelves of brokerages and some banks recently. Lehman’s offer closed last week, but Morgan’s is still open.

Their coupons - between 4.88 and 4.95 per cent per annum for terms of longer than five years - certainly seem very attractive beside fixed deposit rates and local bond yields. Five-year Singapore government bonds currently yield about 3.16 per cent.

But the big question is: are the risks sufficiently explained to investors who are more familiar with fixed deposits than collateralised debt obligations (CDOs)?

Further, are you sufficiently compensated for the risks you take on?

As always, there is no free lunch in the investment world. Today, banks are increasingly rolling out higher deposit rates, but on a short term promotional basis. For instance, if you deposit fresh funds with DBS and also invest in unit trusts or structured deposits, you could get a three-month rate of between 3.425 and 5.7 per cent per annum, depending on the deposit amount.

For those who prefer insurance, endowment products offer the usual blend of guaranteed and non-guaranteed returns. Based on quotes obtained by Executive Money, the annualised yield-to-maturity ranges between 2.6 per cent for Prudential and about 3.12 per cent for Asia Life for a five-year term.

More opportunities

As the tightening cycle appears to be nearing its end, now may be a good time to lock in yields on fixed income assets. Bond managers now see more opportunities, particularly on the longer end.

Lim Heong Chye of APS Komaba says of the US market: ‘Rates at the short end are peaking; at most they may go up another 25 basis points. The US economy is slowing and inflation is not threatening. That makes people comfortable with the long end.’

Enter the new structured notes, labelled ‘Mini-Bond’ by Lehman Brothers and ‘Pinnacle’ by Morgan Stanley. First off, neither are bonds, even though their valuations would be affected by broadly the same factors that affect bonds, such as interest rates and credit spreads.

The two are very similar in structure. There are variations in the coupons, reflecting the credit risk that the funds are linked to.

For Lehman, the reference basket of seven corporations have at least an ‘A+’ rating by S&P. For Pinnacle, the lowest rating of ‘BBB+’ is given to Bank of China and Thailand sovereigns. The relatively lower rating would partly explain the higher coupon that Pinnacle offers.

The marketing machinery behind the two notes makes a big splash of the specific credits that the notes are linked to, creating themes that are linked to Asia or well-known institutions.

But just as important is the credit quality of the underlying assets that investors’ monies will be put into. These are derivatives or ’synthetic collateralised debt obligations’. That sounds like a mouthful of Greek but quite a few retail products, including unit trusts and insurance-linked funds, already have CDOs as their core investment.

Pools of debt

So, what are the notes about?

Broadly, the monies are put into CDOs rated at least ‘AA’. CDOs are pools of debt sold in tranches so that as an investor, you can pick the level of risk and return you are comfortable with. Typically, CDOs can be accessed directly only by institutions. At the lowest unrated tranche, investors will immediately suffer losses if there is any default in the underlying credits. At a tranche with ‘AA’ rating, there is some cushion before the investor begins to suffer a loss of principal.

That is one source of credit risk that investors have to be mindful of. If the underlying CDO suffers default to the extent that the ‘AA’ rated tranche is hit, the note could suffer a ‘mandatory redemption’, which is likely to result in losses for investors.

On this count, structurers like Lehman and Morgan are typically unable to give details of the number of credits the underlying CDOs will have, or any scenario analysis on the number of defaults before a loss of principal is triggered.

A source at Morgan says: ‘We are unable to specify the initial collateral with much more clarity as the actual issuance (actual issuer, the names in the portfolio, the subordination levels, etc) has not been determined. We will structure/source collateral depending on the amount of orders that have been obtained during the offer period.’

The second credit risk is of course that of the reference entities - the basket of specific corporates or sovereigns - to which the investor is exposed on a ‘first-to-default’ basis. Broadly the latter means that the first ‘credit event’ to occur to any of entities would cause the notes to be unwound. A credit event would include bankruptcy, failure to pay obligations, restructuring and for sovereigns, a refusal to pay.

The coupons that the notes will pay out are linked to the coupon of the underlying CDO tranche, as well as the premium it earns from credit default swaps. What the latter means is that as an investor, you have effectively sold protection and are paid some premium for it.

So, what is the bottom line on such products?

First, be comfortable with the risk you take on. Ask as many questions as you can on various scenarios that could trigger a loss. Second, liquidity may be an issue so commit only funds that you are sure you will not need for more than five years. Third, there is little visibility on fees. On such notes, you’re often told there are no fees, but the costs are taken from the spreads.

Fourth, the notes are callable at the issuer’s discretion. Typically the note will be called when interest rates fall, and the note’s value rises. Hence, while a callable feature is typically positioned as a plus for the investor, it is in reality a negative. This is because if rates drop, you will be hard pressed to find an investment with a comparable yield.

Fifth, and not the least, always diversify. This is a complex structure for individuals so the sensible thing is not to overreach for yield.

Wilson Tan said...

This seems a strong evidence of misselling. Make use of it.

poorfish said...

Besides the 4 minibonds mentioned, what about the rest. Is it possible to list them.

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