Product Idea

Bonus Note on Utilities

Enel Technician at the As Pontes power plant located in La Coruna, Galicia Spain. IMAGE ENEL

In times of market uncertainty and political risks many choose to turn towards Defensive Sectors. At the start of 2019, the Utility Sector amongst other Defensive Sectors was considered favorable by many of the leading investment banks.

The Utility Sector in general has a historically low beta to many of the broader markets as with other Defensive Sectors such as Healthcare and Real Estate. Over the past 2 years, the Stoxx 600 Utilities (SX6P Index) had a correlation of 0.65 to the Stoxx 600 Index, 0.67 to the Eurostoxx 50 Index and 0.40 to S&P 500 Index.

The industry tends to generate stable revenues as current macro-economic conditions do not have an impact on consumers’ willingness to pay utility bills.

Due to the high debt levels of the sector, utility companies are considered to be interest rate sensitive. Given the improbability of major interest rate hikes in Europe and U.K, the cost to service these debts is unlikely to increase further.

The sector’s generally high dividend yields makes for an attractive income source for investors, particularly pensions and insurance companies. Bearing these factors in mind, the Utilities Sector could outperform more Cyclical Sectors in the short-medium term.

Bonus Note with Best to Worst option type on Utilities

Given the low volatility, participation notes are the most ideal structured product for investors with a bullish outlook on the Sector.

Format EMTN
Issuer Min A Rating
Currency USD
Tenor 2.50 Years
Underlying’s ENGI FP, ENEL IM, NG/ LN
Call Spread: 100% – 125% (Capped) – Measured on the Best Performing Underlying
Capital Barrier (Geared Put) 70% Strike – Measured on the Worst Performing Underlying
Upside Participation 200%
Payoff at Maturity WO / BO
WO Worst Performing Underlying
BO Best Performing Underlying

Scenario 1

If Performance WO < Capital Barrier, client receives: [Final/Strike] with respect to the Worst Performing Underlying

WO BO Capital Returned at Maturity
65% 110% 100% + [(65%/70%) – 1] *100% = 92.85%
60% 90% 100% + [(60%/70%) – 1] *100% = 85.71%

Scenario 2

If Performance WO > Capital Barrier and Performance BO < Initial, client receives: 100%

WO BO Capital Returned at Maturity
70% 90% 100%

Scenario 3

If Performance WO > Capital Barrier and Performance BO > Initial, client receives: 100% + [2*[Min (BO Final, Cap) – Low Call Strike]] with respect to the Best Performing Underlying

WO BO Capital Returned at Maturity
70% 110% 100% + [2* (110% – 100%)] = 120%
70% 130% 100% + [2* (125% – 100%)] = 150%

Keyfigures Engie S.A, Enel SpA, National Grid Plc

Stoxx 600 Utilities
(SX6P Index)
Engie S.A
(ENGI FP)
Enel SpA
(ENEL IM)
National Grid Plc
(NG/ LN)
P/E Ratio 19.16 12.82 13.39 8.99
P/B Ratio 2.23 0.92 1.76 1.55
Dividend Yield (%) 4.60 5.33 4.94 5.25
3Y Revenue CAGR (%) 4.53 2.36 2.77
3Y Net Income CAGR (%) 8.46 11.79 1.78
3Y EPS CAGR (%) 8.80 12.57 1.12
Av. Analyst Rating 4.54 4.65 4.05
12M Return (%) * 16.00 6.60 3.80
Buy / Hold / Sell 26 / 6 / 0 26 / 5 / 0 11 / 7 / 1

3Y Performance Underlying's

05.04.2016 - 05.02.2019 DATA Source Bloomberg

Your contact person

Christopher Kumpas

CEO Picard Angst MEA

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