Swiss providers are seeking to cash in on the newly introduced lock-in payoff on the back of a market rally that is pushing investors towards products that can keep hold of some of the upside while including downside protection.
“The Swiss Market Index (SMI) recovered all losses after the SNB (Swiss National Bank) decision [to unpeg the Swiss franc] in January”, said Manuel Dürr (pictured), director at Leonteq Securities. “Certain investors do see the market moving up further. Others are more concerned and are looking for some downside protection. The structure combines the characteristics of the popular multi BRCs (barrier reverse convertibles) with the possibility of turning into a 100% capital-protected product if, on one of the monthly observation dates, all underlyings close above the lock-In level, which is usually set to 103% of the initial fixing.
“In Switzerland, where swap rates are negative up to seven years, the need for yield combined with partial or 100% principal protection is definitely there,” said Dürr. “However, structuring 100% principal products in Swiss francs is only possible by adding an additional credit risk (reference entity certificates).”
A lock-in certificate is a capital-at-risk product that can be turned into a fixed-income investment if a predetermined level above the initial strike is reached at any of the observation dates. Otherwise, the product works like a BRC. Lock-in certificates are linked to blue chip share baskets, predominantly Swiss shares, alongside a few others linked to German or US shares, according to SRP data.
Leonteq has been the most active provider of such structures with six lock-in certificates sold this year, followed by Vontobel, with five Lock-in Multi Defender Vontis. “In principle, this structure offers an additional feature, [adding] an enhancement to the most popular structured product for Swiss investors, the multi barrier reverse convertible,” said Eric Blattmann, head of public distribution financial products at Vontobel. “Most investors have a bullish market view, but are wary of any temporary dips, [and, therefore,] they want to be protected from any correction.
The need for full capital protection is strong whereas a normal fully capital-protected product is not attractive in the current market,” said Blattman. “As investors’ expectations are generally positive there is a good chance that the underlying basket reaches a lock-in level of 103% to ensure full capital protection and an attractive coupon. We offer this structure on share baskets rather than indices because the conditions are less attractive on index baskets.”
This year, 14 lock-in certificates have been brought to market by Leonteq, Vontobel, Valiant Privatbank, Notenstein and Cornèr Bank.
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