1

Structured Note and Funding Alternatives

2

Agenda

Making of Structured Note

Risk/ Return

Concerns over Structured Note

Conclusion

3

Power of Derivatives

Structured Note = Debt Instrument + Derivatives

Provides more alternatives to meet with Supply & Demand

“Tailor Made” and “Window of Opportunity” Concept

Linear and Non-Linear payout

Principal guarantee and Non-Principal guarantee

Payout Participation

4

Making of Structured Note

Bond/Note Issuer

InvestorFixed or Floating Coupon

Normal Fixed Income Note/ FRN

Structured Note

Structured Note Issuer

Investor Structured Coupon

5

Investor VS Issuer

Issuer and Investor has to determine their requirement. Issuer – Match their Asset and Liability

Investor – Interest rate or Benchmark views and Portfolio diversification

Making of Structured Note

6

Investor

Taking views on bench mark or interest rate

Investor views on benchmark, i.e. interest rate, SET50, WTI, Credit, is important in selecting fixed income note or structured note.

Portfolio diversification

Instrument available in the market is the key in helping investor better manage portfolio diversity, reducing price risk and or unexpected loss to the portfolio

7

Interest Rate VS Instrument

Lower Interest Rate Expectation Fixed Rate

Higher Interest Rate Expectation Floating Rate

Confidence that Interest will be lower Inverse Floater

Confidence that Interest will stays Range Accrual

8

Making of Structure Note - Issuer

Issuers

By using Derivatives, issuers can match their funding need with their Assets

Potentially able to achieve cheaper cost of fund thru some niche investors

ISSUERBond

Asset

THB Fixed Asset

Structured Note Payout Structured Note Payout

9

Making of Structured Note - KBANK

For KBANK point of view, structured note can be used for KBANK to match term-fund required by the company’s asset thru the issuing of the note. Unmatched coupon payout can be managed thru derivatives.

Asset/ LoanInvestor

Structured Note Payout Fixed or Floating Payout

10

Basic Structure

Investor

Structured Note Payout

THB THB – return on Asset

THB Fixed/Floating

Derivatives

Loan/ Asset

11

Making of Structured Note - Example

Floating Rate Note With Collar

Inverse Floater

Callable Inverse Floater

Range Accrual Note

Quanto Note

SET Linked Note

Credit Linked Note/ Deposit

WTI Linked Note

12

Floating Rate With Collar

0 1% 3% 5% 7% Interest %

ReturnCollar

13

Floating Rate with Collar

Implied THB with Collar

THBTHB Floating return on Asset

THB IRO

14

Inverse Floater

0 1% 3% 5% 7% Interest %

Return

Investor receives higher return when interest rate is lower

15

Inverse Floater

Inverse Floater Note

THBTHB Floating return on Asset

THB IRO

THB interest rate Swap – Receive Fixed, Pay Float

16

Callable Inverse Floater

Investor receives higher return in year 1 while the Note can be called back by issuer at any of the interest payment date

0 1% 3% 5% 7% Interest %

Return

Investor receives higher fixed rate return in year 1, if Note is not called, Payout of will be higher if interest rate is lower, otherwise, 0%

17

Callable Inverse Floater

Fixed Coupon Inverse Floater Coupon

Callable Date

Start Date Maturity Date

18

Callable Inverse Floater

Inverse Floater Note

THB

THB Floating return on Asset

THB CAP

THB interest rate Swap – Receive Fixed, Pay Float

THB Swaption

19

Range Accrual Note

Investor will receives higher return as long as index benchmark is in between pre-determined range

Investment return is subject to minimum of 0%

Coupon = n / N * i %, subject to minimum of 0%

n = number of day index is in between range

N = Total number of days

I = interest per annum

20

Range Accrual Note

0 10% 30% 50% 70% 100% % Day in Range

Return

21

Range Accrual Note

n/N * i% , minimum 0%

THB

THB Floating return on Asset

THB interest rate Swap – Receive Accrual Payout

22

SET Linked Note

Investor will receive higher return if SET Index move higher, other wise subject to minimum of 0%

0 1% 3% 5% 7% SET Index Increase %

ReturnCAP Return

23

SET Linked Note

SET Linked Note

THBTHB Floating return on Asset

SETI Cap Spread

24

Credit Linked Note/ Deposit

CLN are designed to resemble a synthetic bond or loan

The CLN/CLD is payable in full at maturity unless a Credit Event affecting the Reference Entity occurs during the instrument’s life. The coupon of the CLN/interest on CLD reflects the issuer’s funding cost plus an amount to compensate for the credit risk of the Reference Entity

If the Reference Entity suffers a Credit Event, the investor receives either physical bonds or a cash amount equivalent to the post-default market value of the physical bonds. The note/deposit is then cancelled

CLN are normally issued by a Bank or a Special Purpose Vehicle which holds some form of a cash collateral financed through issuance of notes

CLN/CLD can be structured so as to generate an enhanced yield or meet specific investor requirements

Why “Window of opportunity” is important ?

26

Indicative Pricing of Inverse Floater

0.00000

1.00000

2.00000

3.00000

4.00000

5.00000

6.00000

3MImp 6Mimp 1YR 2YR 3YR 4YR 5YR

Tenor

%

28-Feb-02

29-Jan-03

Tenor 3 Year> 3.5%-6s Implied THB

Tenor 3 Year

> 6.0% - 6s Implied THB

27

Indicative Pricing for Floating Rate with Collar

0.00000

1.00000

2.00000

3.00000

4.00000

5.00000

6.00000

3MImp 6Mimp 1YR 2YR 3YR 4YR 5YR

Tenor

%

28-Feb-02

29-Jan-03

Tenor 5 Year> Implied THB ???

Tenor 5 Year

> = Implied THB 3%, 5%

28

Concerns over Structured Note

Issuer’s Risk

Market Risk of which benchmark has been “Set”

Principal Return

Tenor

Liquidity – Secondary Market ?

Investor’s knowledge

29

Sensitivity

What is the impact of the value of individual transaction or portfolio to the change of a certain percentage of referencing benchmark ?

The impact of the change of the curve – Flat, Steep, and Negative

Greeks – What is the change of the value of transaction or portfolio over time ?

Sensitivity will help monitoring and better manage portfolio’s return

Trigger Level is also important

30

Valuation – Keys Concern

Principal guarantee VS Non-principal guarantee

Transferable VS Non-transferable

Mark-to-Market VS Accrual

Accounting Treatment

31

Individual VS Portfolio Based

100

100% Fixed

50:50Fixed : Float

50

50 1/31/3

1/3

1/3:1/3:1/3Fixed: Float:

Other

Investor may view return on each specific investment

Is it efficient ?

32

Individual VS Portfolio Based

To Maximize return on investment

Portfolio Composite to match investment “Guide Lines”

Portfolio Composite to match investment “Objectives”

Derivatives can help providing “Alternatives”

What else are we concerned ?

33

Sensitivity

What is the impact of the value of individual transaction or portfolio to the change of a certain percentage of referencing benchmark ?

The impact of the change of the curve – Flat, Steep, and Negative

Greeks – What is the change of the value of transaction or portfolio over time ?

Sensitivity will help monitoring and better manage portfolio’s return

Trigger Level is also important

34

Conclusion

Derivatives provides more alternatives for Investors while issuer potentially achieve better cost of fund for term liquidity

Window of opportunity is important

Alternatively, bank can use structured note (CLN) as the tools to reduce counterparty risk or credit risk to the bank by passing risk to end investor, buyer of CLN