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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 coupons (conditional upon specific scenarios being met)
Potential to earn an enhanced return if the performance of the underlying financial instrument is in line with the expected view
What are SANs?
SANs are equity-based structured notes. They are used by investors to receive enhanced yields even when the prices of the underlying stocks are declining.
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 if the underlying reference stocks' prices do not hit or fall below the knock-in or downside barrier level
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 periodic observations – weekly or monthly.
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||N.A.||Principal + Pro-rated coupon |
|2||Yes*||Yes||N.A.||Principal + Coupons|
|3||No||No||Below intial price||Principal + Coupons|
|4||No||Yes||Below intial price||Principal converted to LPE share at strike|
*Both stocks close above their call price on the final observation date.
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.
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.