Lowes Autocall Review 2022 Update
Prior to the market correction in 2020, these extended terms proved inconsequential. However, the market correction and infectious uncertainty arising from the Covid-19 pandemic is an example of a ‘Black Swan’ event that the introduction of the longer terms sought to overcome, by providing more opportunities for the investment to mature with a positive outcome. Whilst the market has recovered from the pandemic fall it is still fundamentally our view that common sense should prevail here; the longer a plan has to run, the greater the chance of positive maturity through recovery in the event of as market crash, whilst benefiting from snowballing coupons. Ultimately, we hope that no situation arises whereby short term autocalls are caught by adverse conditions to loss-making effect, but we will continue to advocate the obvious benefit of the extended maximum term not least because they provide very welcome peace of mind right when it is needed.
Counterparties
The ‘counterparty’ is the financial institution (typically a bank) that issues the securities from which the structured product is comprised. Whilst the product administrator and custodian facilitate and safeguard client money during the term of the investment, the return of invested capital is ultimately dependent on the continued solvency of the issuing counterparty. The FTSE only capital-at-risk autocalls issued to date utilised eighteen counterparty banks, nine of which were participating in the sector in 2021. The chart below highlights that the most prevalent counterparty was Investec Bank, issuing approximately one in five of all contracts. This will however no longer be the case following Investec’s announcement in February 2021 that it was withdrawing from the market. Participating Counterparties in FTSE linked capital-at-risk autocalls, issued 2003 - 2021 Investec Barclays Societe Generale HSBC BNP Paribas
Morgan Stanley Goldman Sachs Credit Suisse Natixis Santander & Abbey National Royal Bank of Scotland Others & not known Citigroup Lehman Brothers
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Four FTSE 100 linked autocalls issued between April and August 2008 utilised Lehman Brothers as counterparty and as such, failed in October 2008 when the bank collapsed. Whilst these investments did not therefore, ever mature, the wind up of the Lehman’s’ estate saw investors recover between 76.53% and 97.48% of original capital, depending upon the product, albeit this was paid in instalments over the following 11 years.
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