RBS takes structured products to Nordic corporate treasuries

Patrick Stockenvall

Royal Bank of Scotland (RBS) has launched a structured product aimed at corporate treasuries in the Nordic region. The Loan Financial Target Vol Aquantum Option features an innovative structure and marks an advance in the sale of products to companies. “The concept is quite simple, but it took nine months to deliver. It’s a really complex structure on the back of this simple concept,” says Mathias Westling, London-based co-head of the Nordic and Eastern European region at RBS.

Similar structures have been used in the Swedish property market, but without the capital-protected element that ensures investors receive at least their initial investment back at the end of the five-year term. Four one-year options and one five-year option – written by RBS – are included in a structure that involves a diversified group of investors pooling their capital. The deal also involves a special purpose vehicle (SPV) that takes a loan from RBS, collateralised by the structured note issued by the same bank.

The structure, which was created in partnership with distributor SIP Nordic, is aimed at investors who have cash flow but lack large amounts of money to put up front, such as corporate treasuries. “Instead of buying a very expensive option upfront, the investor buys a long finance note on which it pays interest,” says Westling.

“The structure combines a low-risk and low-volatility strategy with extremely high gearing and leverage,” says Jonas Bohr, head of sales at SIP Nordic in Stockholm. “Investors need the Aquantum strategy to deliver 6.7%. If it comes in at 10% a reserve of 3.3% is allocated for next year’s need of 6.7%, with the growth requirement for year two then to be minimum of 3.4%. As a result of the extreme leverage on share capital, every percent growth above 6.7% annually will result in roughly 100% growth in the invested share capital. 

Ninety percent of the investment is structured as a loan, which has an annual interest rate of 4.6%. The risk comes if the Aquantum strategy doesn’t deliver 5.7% in the first year, when the company will need to find new share capital or arrange an increase of the loan.
The business concept is to accumulate a reserve, then for the last year hope for a big accumulated reserve payout and pay back of the loan.”

The end investor is the SPV created for the deal, in which the investors have a share. “It is very capital efficient because you do not need to put up a lot of money on day one, and the interest on the loan can be deducted from the final payout before taxation,” says Westling. “If the annual performance of the underlying is good, the structure saves the annual excess above the 5.76% interest cost as a reserve that can be used to pay for the following year’s interest costs.” 

Should performance fall below the required 6.7%, there is a risk to investors. However, they can elect to leave the deal and retain their shares in the SPV, though their value will be diluted as the company issues more shares to the other participants.

 

The underlying is the Risk Stabilised Aquantum Pegasus Index created by hedge fund analyst Aquantum and calculated by RBS Sempra Commodities. “We wanted an underlying that does not jump up and down too much, because stable cashflows are needed for the structure. The base index is the Aquantum Pegasus ER Index, which is a long and short strategy on commodity futures. The strategy has a volatility of around 3.5% and a Sharpe ratio of 4%,” says Patrick Stockenvall, the other co-head for the Nordic and Eastern European region at RBS in London. “The underlying index for the structure is an RBS index that incorporates a target volatility overlay on the base index: if the volatility of the strategy goes up, your exposure goes down and vice versa. The maximum exposure is 1.45, meaning you are able to leverage the base strategy in favourable market conditions.