Friday, October 24, 2008

Impact of Lehman Brothers on different types of securities

Dear Mr. Tan,
I am not clear why the collapse of Lehman Brothers affect some securities (such as High Notes, Jubilee Notes) more than other securities (such as Minibond)?

REPLY
Lehman Brothers is listed as a "reference entity" in the High Notes series 5 and the Jubilee Notes series 3. When Lehman Brothers entered into a "credit event", the entire capital of the securities is used to pay the swap counter-party. There is nothing left for the noteholders (i.e. investors of these securities).

For the Minibonds, Lehman Brothers is the swap counter-party. With the collapse of Lehman Brothers, another counter party has to be found to take over its place. If this is not done, the underlying securities have to be liquidated now at the current depressed price. This will leave the investors with very little, maybe 20% or less (just a guess). If a new swap counter party is found, the underlying assets can be kept until the maturity date. Hopefully, the price will be higher, but the investors is not likely to get back 100%.

For the securities that have not defaulted yet, the investors will still face the following risks prior to the maturity date:

a) Risk that any of the reference entity may default (similar to the Lehman Brother situation)
b) Risk that the underlying assets may defaults
c) Risk that the swap counterparty may default

All these risks remain quite high, under the current global financial crisis.
at

9 comments:

  1. AnonymousOctober 24, 2008 8:30 AM

    During the sale process in MB5, only 6 reference entities are mentioned that will affect the reduction in capital, now the arranger failure also affect the capital reduction. Do anybody has any idea if HSBC, the trusty, collapse, there will also be affecting the capital reduction.

    ReplyDelete
  2. AnonymousOctober 24, 2008 9:00 AM

    Mr Tan,

    Thank you for your explanation. I have a question - from your understanding if all 3 scenario you listed in (a)-(c) do not happen, will the mature value of minibond stay at 100% ?

    Lee

    ReplyDelete
  3. Tan Kin LianOctober 24, 2008 9:03 AM

    Hi Lee,

    The chance of getting back 100% is small. It will be a miracle!

    ReplyDelete
  4. AnonymousOctober 24, 2008 9:59 AM

    Nobody in the right mind would accept a 5% for such a high risk product unless of course they do not know the risk when buying it!

    Cannot understand there are still some people who mentioned that they are people who understand the product and accept the 5% as a good investment knowing the risk! If there are any, these investors need to be treated at Woodbridge!

    ReplyDelete
  5. AnonymousOctober 24, 2008 11:47 AM

    Hi Mr Tan,

    I am still not sure on the part that whether or not I can get back 100% capital.

    Mine is Pinnacle Series 7 and in (a) the 6 REs DBS,UOB,OCBC,SingTel,BAC & CityGp; and (c) Swap counterparty Morgan Stanley in both credit default swap & Equity Option - there is an equity option element in this series for a potential Equity Bonus Coupon HAVE NOT DEFAULTED;
    but in (b) The underlying assets include a vital CDOs basket consists of 125 Co's CDOs has 4 CDOs already defaulted - Lehman Bro, Fannie Mae, Freddie Mac & WaMu and it needs 5 more CDOs to default to trigger a credit event.

    As at this morning, I was told that if the situation at the maturity remains as the same, I shall get back 100% (Though I was also told that the CDO basket include some Iceland banks which are now in big troubles). The market value I was told is about 5% of the capital now.

    Can any guru please help?
    Rgds!

    ReplyDelete
  6. AnonymousOctober 24, 2008 11:55 AM

    Mr. Tan, out of the risk you mentioned below, (a) & (c) are clear, what is (b) are your referring to the 100 cimpanies in the basket, if so, how do we know which & how good the cos. may be there are already 4 to 5 rotten ones.

    (a) Risk that any of the reference entity may default (similar to the Lehman Brother situation)
    b) Risk that the underlying assets may defaults
    c) Risk that the swap counterparty may default

    ReplyDelete
  7. AnonymousOctober 25, 2008 12:37 AM

    Mr.Tan
    Re:MINIBONDS
    I was informed by a F.I rep that in
    the basket of underlying assets comprising of 100+ securities if
    >10 default there is some loss and
    >12 default will result in a total
    loss for the investor.
    Could not find it in the brochure.
    Is it true ?
    Thanks
    LTW

    ReplyDelete
  8. AnonymousOctober 25, 2008 2:03 AM

    if I knew the risk is so high, then i would rather took the money to casino. At least i have better chance to double up my money.

    ReplyDelete
  9. AnonymousOctober 27, 2008 4:48 PM

    2.03am
    but now casino also tune their machines to suck money or Jackpots are not given out easily.
    Numbers 1...36, ya ya..try your luck.

    I tell you the best way is to attend AGMs. free coffee, free makan and so many goodies..

    ReplyDelete