At Meteor we understand that the needs and demands of all investors are unlikely to be satisfied simply by the range of retail structured products available in the market place.
As such, we offer a bespoke structured product development service that allows us to tailor an investment solution to meet the needs of an individual, small group of investors, organisation, pension scheme or charity.
The construction process is driven by client’s specific investment requirements and encompasses basic factors such as:
- the required term
- the investment return
- the tax position
- the preferred asset class
The minimum investment required to make the development of a bespoke product viable can be as low as £500,000. Whatever a client’s investment goal, we can develop a structure that can cater for their requirements.
- If income is required the levels are usually fixed at inception and are typically very attractive when compared with rates offered by high street institutions and the Bank of England base rate.
- Whilst these structures generally place capital at risk, if a greater degree of capital protection is required products with variable income levels can be created.
- Growth contracts come in many guises and offer the opportunity for capital growth which, subject to market conditions and the risk appetite of the client, provides a pre-determined return depending on the performance of the underlying asset class(es).
- We can deliver a product which can cater for any term requirement between six months and 10 years. This inherent flexibility is one of the key decision drivers making the use of structures increasingly popular.
- A variety of underlying securities are available to ensure that the returns achieved are delivered in the most tax efficient way pertinent to each client's circumstances. The options available can provide gains assessable to Capital Gains Tax or in any format that utilises tax planning opportunities which arise from time to time.
- For individuals looking to invest via offshore life company bonds we can look, subject to volume, to create structures suitable to both UK and non-UK resident investors.
Another advantage of commissioning a bespoke structured product is the ability to include appropriate levels of capital protection commensurate with the client's risk appetite. As a general rule it should be noted that the higher the degree of protection required the lower the headline participation rate is likely to be. Typically, products either offer 100% capital protection or have degrees of protection against falls in value of the underlying asset class – hard or soft protection.
Hard protection barrier – provides a cap on the maximum potential losses that an investment may return based on the performance of the underlying asset. This will reduce the potential return available compared to a soft protection barrier.
Soft protection barrier – offers protection against falls to a certain level. If this level is breached during the term the underlying will need to recover to a pre-determined level, normally the starting level, or a reduction in capital may result.
The counterparty to a structured product is the institution that provides the underlying securities with the characteristics required to achieve the investment objectives of the product. Our key relationships with all the leading investment banks enable us to procure the best trading terms to suit the client’s requirements. To assist in the assessment of the credit quality of a counterparty, credit rating agency assessments and credit default swaps (‘CDS’) can be used.
Ratings agencies - the main credit rating agencies are Standard and Poor’s (‘S&P’), Moody’s and Fitch. Investment grade debt ratings from the agencies vary from AAA to BBB- for both S&P and Fitch Ratings and Aaa and Baa3 for Moody’s.
Credit Default Swaps – on a very basic level the CDS rating of an institution gives an indication of the potential credit risk associated with the organisation. CDS rates, which are quoted as an annualised spread above London Interbank Offered Rate (‘LIBOR’), show the cost of insuring against a debt default of the underlying issuer and the higher the CDS rating the higher the potential risk of default and hence the more costly is the insurance against it.
When designing a bespoke product we will always take into consideration the client’s specific counterparty demands.
Below are examples of some of the most basic structures which can be used to meet specific investment requirements
Auto-callable – These products are structured to be held for a maximum term but have the ability to mature early if certain pre-determined conditions relative to the underlying asset class are met. For example, a plan may have a six year term, be based on the FTSE 100 (‘the Index’) and pay an annual coupon of 8%. If on any anniversary the Index is at or above a pre-determined level the plan will mature and pay 8% for each year the plan has been in force. If the early maturity conditions aren't met on any of the anniversary dates the plan will run its full term and the return of any initial capital and investment payment will be calculated and paid as per a pre-determined formula.
Income products – These are designed to offer enhanced income levels throughout the term with the return of the initial capital dependent on the performance of the underlying asset. For example, a five year product linked the Index that may pay a gross annual coupon of 6%. Initial capital will be returned in full at maturity provided the Final Level of the Index is not more than 50% below its Opening Level.
Growth products – These offer pre-determined participation in the performance of the underlying asset. For example, a five year plan linked to the performance of an Index may offer a 150% market participation in the performance of the underlying asset subject to a cap of 80%, with the capital return at maturity protected by a 50% barrier.
Further tailoring can then take place in conjunction with the client and their adviser to ‘fine tune’ the proposition. For example, altering the levels of protection in the structure by changing when and how frequently capital return breach barriers are read – taking close of business level(s) on the final day of the term only provides a higher level of protection and is therefore more expensive than having reading close of business levels throughout the term, which again is more expensive than an ‘intra-day option’ where the barrier levels are monitored constantly. Alternatively the client could opt to include ‘averaging’, where final levels are determined by calculating the arithmetic mean values of the underlying at pre-determined observation dates as opposed to simply observing the performance on the first and final day.
We purchase the underlying Securities so the payoff profile covers all establishment and administration costs, fees and expenses payable to ourselves and each financial institution involved, as well as any commission which may be payable for financial advisers in respect of deposits.