Introduction
Are you confused about what type of investments you must choose? You have so many investment options to choose from. These are structured notes, derivatives, equities, stocks, credit notes, and market indices, to name a few.
In this blog, we are covering structured notes vs warrants to make your understanding well-defined, concerning these two investment options.
Structured notes refer to notes that can be linked to debt instruments and equity. You can have these notes linked to mortgage bonds, shares, indices, credit term loans, stock options, futures, and govt deposits.
Warrants are financial derivatives issued by financial corporations enabling investors the right to buy or sell underlying assets at pre-determined rates before the expiry of the products. Investors get optimal exposure to fixed-income securities and the equity market.
In other words, you may have the issuing company give away payouts into stocks or shares of the referenced companies your notes are linked with.
Structured Notes Vs Warrants
Let us explore differential elements between notes and warrants. Helping you get started here:
Volatility
Structured warrants are more likely to expire when the underlying value of the asset doesn’t increase or decrease up to expected values on the set expiration date. Moreover, the warrants do not pay any interest amount until the term of maturity. Therefore, the liquidity of the structured warrant is more volatile. The risk associated with such investment products is also higher on the cards.
On the other hand, the structured notes are customized after the risk profiling of every individual customer is done. The debt component and the asset value provide constant sources of income in the form of coupon payments or asset-related payouts to individual investors. The performance of an underlying asset the notes are linked to determines the investment returns for notes.
In a nutshell, the structured product is less volatile as compared to a structured warrant.
Public Vs. Private Offerings
Structured warrants are usually issued to eligible investors under a registration document via public offerings. The document entails the types of warrants different classes of investors deal with. Therefore, the documents are filed or issued through regulatory authorities or financial committees meant for the same.
On the other hand, structured notes are issued to investors via private offerings. The risk tolerance of every investor is checked and you can customize or create notes with an optimal mix of debt or equity to suit your interest in trading. Therefore, notes are private offerings that are made available to retail as well as institutional investors.
Sustainability
Structured warrants leverage the profits or losses of specific assets as deemed by the issuing companies or banks. Therefore, brokers or dealers exercise caution while issuing these documents to investors.
In other words, the warrants are only issued by bank-appointed dealers or agents to eligible investors. Compelling amounts are added to warrants as minimum purchase amounts so that they are purchased only by sophisticated investors.
For notes, investors have a better degree of sustainability and freedom to choose their level of debt or equity that can be linked to the notes. Plus, regular payouts happen via the debt component and from the equity market. The notes are therefore more sustainable as compared to the complex nature of warrants.
Requires The Presence Of Qualified Financial Underwriters
Warrants are public offerings and therefore specific and qualified financial underwriters present the offer documents. The documents must be written according to the norms as suggested by FINRA (Financial Industry Regulatory Authority). The terms and conditions of underwriting or review of underwriting compensation are also reviewed by FINRA.
On the other hand, as structured notes are investment-grade debt securities, you do not need special underwriters to get the offering documents furnished. The dealer or financial companies format the offering document for notes. The type of structure note you are choosing is primarily stated in the offer document.
Offering Documents
For registered warrants, the offering documents are furnished in a very detailed and comprehensive manner. This is mainly because you must have the following components that cover the crux of the warrant offering documentation:
- Registration letter as stated by the public mandate’s offering
- The prospectus details the types of warrants that are given away to investors
- Pricing supplement that describes the purchase values of different warrants issued to investors and
- Above all, risk factors disclosure concerning underlying assets the warrants are linked to.
On the other hand, structured notes are compiled by investment managers after assessing the income portfolios and risk tolerance capabilities of individual investors. The initial offering document that is created at the time the investor takes up his/her investment portfolio is the only document that is issued under the investor’s name or credentials. The price of the underlying asset may or may not be specified on the initial offer document.
Program Distribution Arrangement
In the case of public offerings concerning the issuance of structured warrants, you may have program distribution documents that are curated for the very purpose. The program may be distributed by one or more distributors, the details of which are also required to be furnished on warrant leaflets. The program’s agreement details may also comprise the legal opinions of auditors for debt securities the warrants are linked.
In the case of structured notes, the underwriting is carried out by third-party brokers or dealers who are not affiliated with or specially appointed by Govt parties. Therefore, the underwriting agreements concerning notes or normal debt securities are not as detail-oriented as you find in warrants. In other words, the basic guidelines are specified for notes or other forms of debt securities.
Other Info As Specified On A Warrant Agreement
In the case of a warrant agreement, you have a core ‘warrant indenture’ that is a contractual agreement between the issuing company and the purchaser of warrants. The document is designed similarly as a ‘paying agency agreement copy’ is done.
So, detailed warrant agreement and indenture documents encompass the following info:
- Roles/ responsibilities of a warrant agent
- Payment mechanism as designed by the issuing company to warrant holders- the document cites info on how interest-related payments are accrued and paid out to the investor
- Info on one or more warrants that create a part of the program
- Federal financial institutions as appointed by public entities curate the agreement program details and various other nomenclature.
Whereas, in the case of structured notes or debt securities, the underwriting document covers payment-related info and other documents in the same offering letter. In other words, different supplements or sub-section documents are not created for structured notes or products as such. The expiry term is clearly stated in notes on the initial offering letter itself.
Helping You Get Deeper Insights Into How You Must Work Around Your Documentation To Get Your Warrants Done
Let us unveil key reference points concerning how you must cumulate your documentation process for warrants.
- The warrants are issued publicly with the details printed on a registration document. This is in issuance to the prospectus the investor receives from the product issuing company. On the registration document, you get details about the different types of warrants that are expected to be issued to investors.
- Added to the registration document and the initial prospectus comes another document. This is called a ‘pricing supplement’ that comprises info on different types of warrants vis-a-vis their pricing slabs.
- You have a circular that comprises the risk factors the underlying assets have. The circular also comprises a complete description of the underlying asset that is linked to structured warrants as such.
- In addition to all these documents, you can also ask for a circular that describes the terms and conditions for the investment program as such. The details of the reference assets and other material info of the product issuing company are disclosed on the same.
- The concise information about the product issuer’s debt securities with appropriate terms and conditions forms a part of the structured warrant’s contractual agreement. The investor can also include hedge funds or time-value commodities as underlying assets for a structured investment program.
Key Takeaways
Structured Notes and warrants have their own set of pros and cons. While warrants have more regulations as stipulated by public entities, structured notes are more diluted when it comes to guidelines or norms.
For a call warrant, the price of the warrant, listed structured products, derivative warrants, prices, and the term of the warrants are mentioned in the disclosed set of documents as such. Whether you want a put warrant or a call warrant, ask the product issuing company to mention details on the contractual documents about the investment portfolio.
The call or put options denote the time value of value-added derivatives or securities. As an investor, you must understand the risk associated with the warrant issuer.
Structured notes are tailor-made after considering the risk tolerance profiling of independent retail and institutional investors while warrants are investment programs offered to institutional investors and high-net-worth individuals. You can create your basket of debt-income securities to make up for a vital product.
Approaching financial firms that have leading advisors can help you arrive at the right investment plan after going through its pros and cons. After all, you would not want to regret taking a plan. Doing in-depth analysis is required before you zero in on the right investment plan.
