Kempen has launched the Van Lanschot Digital Coupon Note 15-22 in the Netherlands. The seven-year, 100% capital-protected European Medium-Term Note (EMTN), which is rolled out from the structured notes issuance programme of the bank’s parent company Van Lanschot, is the first digital coupon note publicly issued by the merchant bank in its domestic market.
“The digital coupon note is a surrogate for a corporate bond. In a defensive portfolio 100% capital protection is required and a possible coupon of 3.50% is seen as more attractive than a guaranteed low coupon on a corporate bond,” said Laurent Guntenaar (pictured), director, structured investments at Kempen. “This product is different from the Index Garantie Notes (IGNs) we issued last year and the beginning of this year. IGNs are also fully capital-protected but a growth product rather than an income product, as they participate for 100% in the rise of the underlying.”
The payout is capped and the coupon, at this stage still indicative at 3.50%, will be determined at the end of the week, when the subscription period closes, said Guntenaar. “In terms of payout, the product looks very similar to a corporate bond,” he said. “Each year, you will get a coupon, which is digital, and the coupon is either zero or 3.50%, depending on how the Eurostoxx 50 performs.”
The product can be compared with a plain vanilla Van Lanschot bond with a maturity of seven years, which would pay an annual coupon of between 1.50% and 2.00% throughout the term, said Guntenaar. “What you give up [with the digital coupon note] is a guaranteed coupon,” he said. “However, the possible coupon of the digital coupon note is considerably higher.”
Products paying annual coupons are in demand from clients balancing their investment portfolios which are roughly divided between bond portfolios and equity portfolios, according to Guntenaar. “At Van Lanschot, the bond portion of the portfolio can only include products which offer 100% capital protection,” he said. “Normally, these products are mainly (corporate) bonds, but they could also be structured notes as long as they offer full capital protection. What we see now is that many bonds are being redeemed. Either they have reached the end of their term, or they are paying a coupon. In other words, there is new money coming in. Because the interest rates are so low, there is not really a good alternative to invest the money which has been released back onto the market in corporate bonds.”
In addition, the low yield on bonds is forcing investors to give up the guaranteed yield but instead they are buying structured notes offering conditional coupons or some sort of equity linked payout, said Guntenaar. “[However], because the yield on corporate bonds is so low, the opportunity loss is almost zero’,” he said. “[If] you buy a Dutch government bond which pays a coupon of 30bp per year for a period of five years: many investors say that is so little, I give up the coupon and buy a note with a conditional coupon, but which offers 100% capital protection, and I hope that the final return is higher than the guaranteed 30bp which I get annually now.”
Guntenaar also said that Van Lanschot has done deals, including private placements, for a number of other private banks were we have specifically designed products to cater for that need. “Of course everyone is looking for yield, but it is really about creating a surrogate for a corporate bond,” he said
Click here to view all 64 structured notes from Kempen listed on SRP’s Dutch database.
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