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Understanding Structured Note Performance & Safety Barriers

This article was written in August 2015 but remains as valid today as it was at the time of writing.

Its contents are intended to assist clients in understanding the mechanisms of structured note performance and safety barriers and is provided for illustrative purposes.


With the latest of our recommended "Structured Notes' having matured this past week we felt that sharing the information on how it has ACTUALLY performed may be of value to those interested and less familiar with Structured Notes.

This 1 Year Income Structured Note was Issued By Commerzbank in August 2014 and was aligned to three oil industry related stocks :

1 Anadarko Petroleum Corp

2 Phillips 66

3 Valero Energy Corp

The terms of the Income Note were set out as follows and made 2 promises to the investor :

1 Guaranteed Annual Coupon (interest) of 9% - this was scheduled to be paid at the rate of 2.25% / per quarter

2 A Full Return Of The Capital Invested If The Safety Barrier of -40% Was Not Broken

How Does And How Did The Safety Barrier Work ?

The safety barrier terms of the structured note simply states that provided the sum of the stocks at maturity have not fallen by more than 40% a full return of capital will be paid - (the guaranteed income of 9% pa having already been paid to investors each quarter)

The stocks , their starting and their final prices were as follows :


The starting price (actually referred to as a "Strike Price") is recorded at the commencement of the note.The following prices of the stocks were noted as follows :

  • Anadarko Petroleum Corp - 105.62
  • Phillips 66 - 80.54
  • Valero Energy Corp - 50.44

The final (maturity) prices after the 1 Year Term had expired were also noted as follows :

  • Anadarko Petroleum Corp - 75.70
  • Phillips 66 - 82.52
  • Valero Energy Corp - 69.00

The positive and negative performance of each of the stocks can therefore be summarised :

  • Anadarko Petroleum Corp - -29%
  • Phillips 66 - +2.4%
  • Valero Energy Corp - +36.7%

Remembering that the sum of the stocks must not lose more than 40% we can easily calculate if the safety barrier has been breached :

-29% + 2.4% + 36.7% = +10.1%

In this real life scenario therefore we can observe that despite a -29% fall in the Anadarko Petroleum Corp stock price the safety barrier of -40% was nowhere close to being broken - particularly when you add the remaining two stocks performance into the equation.

We can therefore conclude that the objectives of this particular Structured Note have been met in that a realistic risk / reward ratio has been fulfilled which has provided investors with a

  • 9% income return on their capital
  • Full return of capitulate the 1 year maturity date
  • A safety barrier mechanism that shielded investors from a stock price reduction in the Anadarko Petroleum Corp of -29%