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Step-down Autocallable Notes (SANs)
At a Glance
Ability to express a particular view on market price movements
Potential to earn an enhanced yield i.e. coupons (conditional upon specific scenarios being met)
What are SANs?
SANs are equity-based structured notes. They are used by investors to receive enhanced yields and could work well even in slightly bearish markets when the prices of the underlying stocks are falling.
However, coupon payment is conditional upon either the “knock-in” (or “downside barrier”) never being breached on “observation dates” during the note’s tenor or the “least performing equity” (or worst performing stock) is above the “knock-out” level.
SANs are sophisticated investment products that carry significant risks and are not suitable for investors who do not comprehend the product or are risk averse.
How do SANs Work?
The details of SANs can vary. Below is a common variation.
Investors agree with their bankers or stock brokers on:
- A basket of stocks (for example, a two-stock basket)
- Strike level
- Knock-out or auto-call level
- Knock-in level
- Coupon payable
The knock-out or auto-call levels typically decline with each observation period – hence the name “step-down” for the structure.
Typically, SANs are based on American Knock-Ins (daily price observations). Knock-outs are typically based on monthly periodic observations.
Illustrative example of a SAN with 2 underlying shares:
|Underlying||Basket of Company A and Company B|
|Strike level||95% of initial level|
|Call (Knock-out) level||100% (Step-down 2% monthly periodic)|
|Agreed conditional yield||12% p.a. (1% per month)|
A call or knock-out event can only occur when both companies’ share prices are equal to or above their respective call prices on any Call Determination Day (the day when the note’s call levels are being observed).
|Scenario||Is Knock-out Triggered?||Is Knock-in Triggered?||Performance of Least Performing Equity||Redemption|
|1||Yes||No||Above call level||Principal + Pro-rated coupon |
|2||Yes||Yes||Above call level||Principal + Pro-rated coupon |
Principal + Coupons
|3||No||No||Below call level||Principal + Coupons|
|4||No||Yes||Below Strike Price||Principal converted to LPE share at strike|
The scenarios above are for illustration purposes only, and payoffs may vary depending on how the note is structured.
Benefits of SANs
Enhanced yields may be earned even when the prices of the underlying stocks are declining. This, however, is conditional upon the knock-in not being breached on observation dates throughout the note’s tenor or the worst performing stock is above the knock-out level.
SANs can be tailored to suit the investor’s needs, based on his/her choice of parameters, such as the underlying equities, exchange traded funds, or indices, knock-in and knock-out levels, frequency of call, and tenor.
Risks of SANs
SANs are issued by financial institutions and investors are exposed to the issuer’s credit risk.
To understand the product-related terms, visit our Glossary.
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