Jefferies’ $4.1 million capped leveraged notes on S&P 500 may compete with ARNs

By Emma Trincal

New York, March 30 – Jefferies Group LLC and wholly owned subsidiary Jefferies Group Capital Finance Inc. priced $4.1 million of 0% senior capped buffered leveraged notes due April 13, 2023 tied to the S&P 500 index, according to a 424B2 filing with the Securities and Exchange Commission. The terms of the notes are similar to and perhaps even better than those of “Accelerated Return Notes,” or “ARNs,” a trader noted even if the issuer is a lesser-known player.

If the index finishes above its initial value, the payout at maturity will be par plus 2 times the gain, capped at par plus 13.25%.

If the index finishes flat or falls by up to 10%, the payout will be par. Investors will lose 1% for each 1% index decline beyond 10%.

Short and protected

“It looks like a good product to me,” this trader said.

“To have 2x leverage with a 10% buffer on a 13-month, I think is attractive. It may be even more attractive than your typical ARN.”

“Typical” ARNs are issues routinely distributed by BofA Securities at the end of each month. In their shortest version, they usually feature a 13- to 14-month tenor. The upside is levered three times up to a cap, but investors are fully exposed to losses.

“I’d rather take 2x leverage with the downside protection than 3x without it,” he said.

Jefferies

Jefferies Group and its wholly owned subsidiary Jefferies Group Capital Finance are still a relatively small player in the structured notes area. Previously known for its focus on interest-rate-linked notes, the issuer has made a push in equity-linked notes issuance.

So far this year, Jefferies has brought to market eight offerings totaling $15.1 million, according to preliminary data compiled by Prospect News. Only two deals totaling $4.2 million were rate products with the rest issued on equity indexes. All equity products are buffered and nearly all of them are leveraged upside. The issuer does not use worst-of but rather a single index, such as the S&P 500 index, the Dow Jones industrial average and the Russell 2000 index.

Over the course of last year, Jefferies Group/Jefferies Group Capital Finance issued $122 million in 33 deals, the data showed.

U.S. credit

“We’ve worked with them before. They have a strong credit and it’s a U.S. issuer. That’s a plus,” the trader said.

“A lot of investors want to stick with U.S. benchmarks. They also prefer dealing with U.S. banks. If you sell to Omaha, Nebraska, they want American issuers as opposed to a French or a Swiss bank. It’s just the way it is,” he said.

That preference is not related to the crisis in Ukraine, he noted.

“Clients have always been U.S.-centric. European banks’ exposure to Russia is very limited and the banks that have exposure to this country are not issuers of structured notes here,” he said.

Different profile

One caveat however is the fact that Jefferies is not a full-service bank.

“They’re an investment bank, not a full-service Wall Street bank. That said, the climate post-Dodd Frank has changed. I think Jefferies is likely to grow in this market especially if they can offer compelling terms.”

A market participant said he has not noticed notes issued by Jefferies.

“We don’t see them much as an issuer. They’re usually just an agent,” he said.

The short duration of the notes combined with a buffer was likely to be appealing to some investors, in particular conservative ones.

But he objected to the comparison between those notes and traditional ARNs.

“You can’t really compare this with something that has 300% upside and 100% downside,” he said.

“These are two different products for different people.”

Jefferies LLC is the agent.

The Cusip number is 47233JHW1.

The notes settled on Friday.

The fee is 0.1%.

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