Derivative-based investments structurers are crying foul over the competition presented by U.K. distributor Keydata's life-assurance based income product. Keydata's Secure Income Bond, a securitization of corporate life assurance policies, is promising 7.5% income per annum plus capital protection. Equity derivative structurers are griping there's a risk it won't deliver on these promises, so it should carry similar risk warnings to those required for the equity-linked investments they structure.
Structurers are feeling the heat from Keydata's competitive note. "We've been asked if we can match [this return] and we can't," said one equity derivative structurer. Several officials said the note's high returns should raise alarm bells about the risk involved in the product and said they are surprised it hasn't attracted the attention of the Financial Services Authority. Robin Gordon-Walker, spokesman at the FSA, said he is not aware of the details of the Keydata product, but noted in general it is up to structurers and distributors to ensure they have adequate risk warnings on products.
Mark Owen, sales director at Keydata in London, said he is satisfied with the due diligence that has been carried out on the underlying policies. He said suggestions the product has escaped certain regulatory requirements are "sour grapes." The bond is listed in Luxembourg and fully passportable through Europe, he added.
The bond's returns depend on the life policies, all issued by A-rated and above insurers, maturing as predicted by a model written by actuaries at KPMG. Dealers say there is still a risk the policies may not mature as the model dictates, even with an inbuilt error margin. The bond and its disclosure information satisfied both internal and external compliance, noted Owen.
The tranches of the securitization behind Keydata's note are time-based, ranging from one to seven years. Keydata's note references the five-year tranche, which officials who have looked at the documentation said is the riskier end because--in the case of shortfalls in the shorter-dated tranches--the vehicle may have already used up its liquidity facility, or sold on policies to generate cash. Owen said this would only be the case if there had been no maturities at all in earlier years.
What irks Keydata's competitors the most is not the structure of the deal, but what they see as unclear advertising. "I don't think financial advisors can understand what they're offering here," said one U.K. salesman. Keydata's note is tempting to advisors, however, because it offers 3% in initial fees and 0.5% for each subsequent year--rates almost unheard of in derivative-based structured products. Owen declined to say how much the note has raised so far.
