Dresdner Kleinwort Wasserstein has started marketing what it believes to be the next generation of capital guaranteed equity-linked notes which offer 100% principal protection while also providing 100% upside participation. Matthias Schellenberg, head of over-the-counter equity derivatives sales for Germany and Austria in Frankfurt, said regulators recognize this structure as a guaranteed product.
In common with other principal protected vehicles, Dresdner plans to guarantee the principal amount by investing in fixed income securities. However, the main difference is that investors are likely to get their hands on a bigger piece of the principal at maturity of the equity portion, Schellenberg explained. For example, assuming an investor buys into the product when the index is trading at 100, if the index falls to 90 at maturity then the investor will receive 90% of the principal amount but will have to wait until the fixed income portfolio generates the balance, Schellenberg said. Under similar market conditions a traditional guaranteed note would pay out 100% of the principal at maturity of the fixed income portfolio.
Derivatives structurers at rival banks said they have not seen this type of product before. Previously structurers have only been able to offer guaranteed products by eating into the participation rate the note gives investors, or by including an Asian-style call rather than a plain-vanilla call.
Schellenberg thinks Dresdner has hit the jackpot with this product and has named it Optimax because it has an optimal maturity with maximum participation. The product was designed for German insurance companies as they are typically only allowed to enter structured products with guarantees. But Schellenberg thinks the product has much wider appeal, noting that it qualifies as a "simple structure" under the R3/99 regulation, a regulation governing what German insurance companies can invest in.
Claus Weber, investment manager at Swiss Re Germany, was not familiar with the product but said it sounded like the type of vehicle he would invest in. German reinsurance companies are not regulated in the same way as insurance companies so Weber is free to invest directly in index certificates and chooses to do that rather than opt for guaranteed notes because it does not want its participation rate diluted. The offer of unlimited upside and only limited downside caught Weber's attention. He added "I will phone Dresdner about the product to find out more." Swiss Re Germany invests EUR1 billion (USD850 million) about 5% of which is invested in European delta-one index certificates.
