Sigma offers Italian investors new variation on the Phoenix

While much has changed in the financial markets over the course of the year, little has changed when it comes to the tastes of Italian investors, who still pine after the fixed-income payments typical of the old darling of the market, the tired obbligazione. Having long ditched traditional bonds in favour of more flexible, svelte and, crucially, higher-yielding certificates, Italian investors seem to have accepted that full capital protection is a luxury they can no longer afford in this era of low interest rates and quantitative easing.

Old habits die hard, however, and the desire for a regular income stream is still driving the structured products market, perhaps now more than ever. Sixty-one percent of products added to the Italian SRP database in September and October offer some form of income, whether as a fixed one-off payment or on a recurring basis; less than 20% of products offer some form of fixed capital protection, with the vast majority compromising the offer of guaranteed protection with a soft, barrier-contingent version.

Investors, not only in Italy, have been chasing income for the past few years, according to Alessandro Manini, director, sales and distribution for private banks and family offices at Banca IMI. “As long as interest rates remain at current levels, certificates offering regular payments should remain popular,” said Manini.

Phoenix certificates have risen to the forefront of investors’ minds when it comes to delivering regular and relatively high coupons (typically anywhere between 2% and 10% pa., depending on the underlying and duration of the certificate) as well as offering a barrier-contingent knockout option, another much touted feature; Athena and Cash Collect certificates are another popular option.

Given the popularity of this formula (income payments, plus opportunity for early redemption, plus conditional protection provided by a barrier), virtually everyone in the market is issuing similar structures (Banca IMI, BNP Paribas, Deutsche Bank, Exane Derivatives, Societe Generale and UniCredit and are all active on this front), creating an incentive for structuring desks to develop their own variations.

“In recent months, we have explored lower-risk alternatives to the traditional Phoenix certificates,” said Manini. “Given the current market volatility, clients are looking for payoffs that offer decent upside but also limit losses in adverse scenarios.”

The Standard Long Autocallable Barrier Worst of Sigma, Banca IMI’s newest play, pays quarterly coupons of 1.75%, provided the worst-performing of three underlyings is at least equal to 69% of its initial level on a given observation date. If no coupon is paid, it rolls over to the next quarter; if all the underlyings close at or above their initial level, the certificate redeems any available coupons and matures early. What differentiates this from a standard Phoenix certificate is that, at the final observation date, if the worst-performing underlying closes below 69% of its initial level, the certificate pays a fixed return of 31%, plus a one-to-one participation in the underlying.

“The Sigma certificate still has the main characteristics of a traditional Phoenix, ie. regular coupons, memory effect and conditional capital protection at maturity,” said Manini. “However, by introducing a Sigma payment in the negative scenario, it also reduces and smooths the potential capital loss at maturity.”

The standard long autocallable barrier worst-of Sigma closed for subscription on October 22 and collected a total of €3.4m, a rather small amount compared with Banca Aletti’s income-paying Target Cedola, a fully capital-protected certificate which took in €281m. Manini concedes that the uptake has been slow on the new product, but says that this is probably due to the novelty of the payoff.

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Sigma offers Italian investors new variation on the Phoenix