exploding the myths

of ...............................

1. Structured Notes V Unstructured Notes  (Issuers Risk)

All MTN's are simply fancy Promissory Notes issued by a bank or company or other entity as a method of raising capital.

They are either Subordinated Notes  or Unsubordinated Notes which simply put means they are either secured (Subordinated)
or Unsecured (Unsubordinated). 

They are in fact Direct Debt Obligations guaranteed by the issuer.

Structured notes have risk diversification elements behind the notes however these are not to protect the borrower
but are to protect the issuer.  Remember the issuer has guaranteed the notes and as such has a liability to pay
both the Coupon (Interest) and the face value at maturity. 

What a structured note does is to spread the risk through a portfolio of stocks etc.  In this way should a particular
stock fail then this can often be compensated by the performance of another to balance out.  The stock selected is often
correlated across sectors, geographies and industries.  For example an oil Company would be correlated against a
transport company so if the price of oil went up the oil company would make more profit yet the transport company
would pay higher fuel costs and make less profit - this is a direct correlation.

This makes the issuer feel safer over say a 10 year term than a simple unstructured debt however it has NO
EFFECT ON THE BUYER it simply helps protect the issuer against big losses and a resulting big liability.

Many times you will see that MTN's are structured so that the issuer can even SWAP underperforming stock with
alternate similar stock.  This means the portfolio is managed and under constant analysis and further protects the issuer.

REAL BUYERS DO NOT DIFFERENTIATE BETWEEN STRUCTURED NOTES AND UNSTRUCTURED NOTES UNLESS IT IS
A POLICY OF THE BUYING FUND.
..............................................................................................................................................................................

2. Plain Vanilla

This is simply the correct terminology for an unstructured note.
Because the issuer is at greater risk of loss the coupon (interest) rates of these notes is lower than for structured notes.
Issuers can only issue 10% of their paper as Plain Vanilla.  It is harder to find than Structured Paper.

INVESTORS GET A BETTER RETURN FOR STRUCTURED NOTES THAN THEY DO FOR PLAIN VANILLA
..............................................................................................................................................................................

3. Buyers Risks

A buyer of an MTN has 2 basic risks:

• The Coupon Risk - will the interest be paid.
• The Maturity Risk - will the issuer be around to pay the face value.

THE RISK TO THE BUYER IS REFLECTED IN THE MOODY'S OR S & P RATING OF THE NOTE - AS  A GENERAL RULE BUYERS
LOOK FOR INVESTMENT GRADE PAPER WHICH IS RATED BETWEEN 'BBB' & 'AAA' (AAA BEING THE HIGHEST).
..............................................................................................................................................................................

4. Cash Backed

Sorry but there is no such thing - what this means is simply 'Plain Vanilla Paper'.  Remember MTN's can only be Subordinated
or Unsubordinated.

IF ANYONE ASKS FOR OR OFFERS 'CASH BACKED' THEN BE CONCERNED - THEY DO NOT KNOW THIS BUSINESS.
...............................................................................................................................................................................

5. Things that matter to ......

........ an investor buyer

The buyer would consider the following:

• The Yield to Maturity of the Paper (Yield%)  A sum of Interest, Discount and Time calculated to a specific formula.
• The Coupon Rate (Especially if they are borrowing to buy the paper)
• The rating of the paper.
• The structuring to ensure they had minimal duplication in their paper portfolio.  This is also an important factor if
  purchasing corporate paper rather than bank paper.

........ a flip buyer (a buyer who is buying just to on-sell)

• Discount (this is important as they want to add the flip fees and still make it less than face value if possible)
• Coupon (again they want it as high as possible so the flip fees do not make the yield un-sellable)
• Rating (this just makes it easier to sell as the rating gets higher)

YOU NEED TO WATCH THOSE FLIP FEES SOME OF THESE GUYS ARE VERY GREEDY
................................................................................................................................................................................

6. Exit Buyer

Anyone who buys paper is an exit buyer to the seller.  This is not correct terminology and is often used by flip buyers to
describe the client they are on-selling to.

EXIT BUYER USUALLY MEANS THAT THEE IS A FLIP BUYER IN THE MIDDLE

...............................................................................................................................................................................

7. Reality Check

• Structured notes rarely return a yield greater than 10%
• Plain Vanilla rarely returns a yield greater than 6.5%
• Screen, Block & Pay is nonsense.
• Bloomberg closing is nonsense - this is not a settlement system.
• Big discounts on issue price for investment grade instruments (MTN, Bond, BG, CD etc is nonsense.)
• The higher the rating of the paper the issue price gets nearer to face value.

AA & AAA rated notes are often sold at PAR (PAR = FACE VALUE I.E. NO DISCOUNT)
.............................................................................................................................................................................

8. New Issue V Seasoned

This is often touted as a major concern by those with little experience.  All paper at some point in its life is New Issue.
Seasoned simply means it has been issued and is more than 90 days old.

THERE IS NO SUCH THING AS SLIGHTLY SEASONED - EITHER IT IS OR IT ISN'T

To an experienced buyer it does not make any difference.  To the inexperienced they get comfort from knowing the
ISIN number. Others choose seasoned that has a record of sales so they can see how easy it is to move.
If your buying and holding then it is of no real concern.

YOU SHOULD NOT FEEL SAFER IF OFFERED A SEASONED INSTRUMENT. IN FACT THE SAFEST PAPER TO BUY IS
NEW ISSUE FROM A RESPECTABLE RESOURCE SUCH AS HSBC, LEHMAN BROS, MERRILL LYNCH ETC. AT LEAST YOU
KNOW THE ISSUER IS THE REAL OWNER - MOST FRAUDULENT OFFERINGS GIVE A REAL ISIN NUMBERS ON REAL PAPER
WITH  FALSE OWNERSHIP.

..........................................................................................................................................................................