Principal Protected Note (PPN)
The PPN is, for practical purposes, a zero-coupon bond with a link to an equity market. It offers a way to participate in the investment return of a risk-related asset class, at a reduced level of risk.
The market for PPNs has existed since the late 80’s. It is a global market, but the focus seems to be on European banks (issuers) and brokers (arrangers). The US market is limited, primarily because of tax considerations in non-deferred accounts and onerous legal documentation requirements, since the structure includes a derivative.
Throughout the unpredictable and volatile market conditions that characterized the late 1990s and early 2000s, investors increasingly sought out new approaches to investing that offered both security and potential growth.
100% Principal Protection
A typical PPN could be a 3-5 year structure which tracks the performance of a basket of Asian stock market indices. At maturity, the return on the PPN will be the accumulated return on the basket. If the return on the basket is negative, the investor still receives 100% of his nominal investment (principal protection). This is possible because at issue the bulk of the investment is allocated to a zero-coupon bond and the rest is allocated to a derivative which tracks the performance of the indices. Over the life of the PPN, the part allocated to the zero-coupon bond grows enough to guarantee the repayment of 100% of principal.
High Growth Potential
The value of the derivative will generate the positive return at maturity, should the markets appreciate in value. The structure will typically generate 100% of the actual return of the linked asset (if positive). Sometimes we will accept a risk capped at 5-10% of nominal amount, in order to invest in a structure which yields 150-300% of the actual return of the linked asset.
Security and Liquidity
All the PPNs Nordica will consider for clients are:
1. Issued by large, well-known international banks which carry at least a single A credit rating.
2. Listed on a recognized stock exchange.
3. Liquid, with a possibility to sell at any time (not just at maturity)
4. Competitively priced with compelling terms of participation.
Please note that the guarantee, offered by the issuing bank, is valid at maturity only. If an investor decides to sell in the secondary market, it will be done at a trade price, which may be higher or lower than the initial issue price.
Profit Lock-in Feature
Typically, Nordica will utilize the secondary market to lock in a profit, by selling a previously issued PPN and rolling the money into a new structure.
As an example, recently we sold a 5-year PPN linked to a basket of international stock market indices which had been issued by UBS during 2009, at a price of 130% of nominal investment. The money was rolled into a new, similar structure. This has created a floor at 130% of the original investment, since the new investment also carries 100% protection of nominal amount. The alternative was to wait up to 4 years on the original investment and, potentially, risk losing the 30% un-realized profit.
Personalized and Exclusive
Nordica is continuously invited to participate in offerings of publicly issued PPNs. In addition, we are able to shop around for terms on a proprietary “Nordica PPN”, whenever we decide to invest at least $3M at one time. Such a structure will of course still be issued by a single A rated bank and carry the same features as above. The advantage is that we are able to come up with a unique structure, to meet the individual needs and preferences of our clients, at that time.