Jefferies’ $1.6 million notes on Nasdaq raise concerns over cap, short tenor, advisers say

By Emma Trincal

New York, July 7 – Jefferies Group LLC and Jefferies Group Capital Finance Inc. priced $1.6 million of 0% leveraged buffered capped notes due Jan. 5, 2024 linked to the Nasdaq-100 index, a traditional structure for growth and asset allocation. But the terms disappointed advisers for opposite reasons. One felt that the potential gains were hampered by the cap; the other worried about the downside risk over a short investment period.

The payout at maturity will be par plus 200% of any index gain, capped at a maximum return of par plus 21.9%, according to a 424B2 filing with the Securities and Exchange Commission.

If the index falls by up to 10%, the payout will be par.

Investors will lose 1% for every 1% decline of the index beyond 10%.

Upside risk

“It’s always nice to have that Nasdaq exposure in a diversified portfolio,” said Steve Doucette, financial adviser at Proctor Financial.

“But you’re thinking rangebound if you buy the notes. I’m not sure that’s my thinking.

“The index is up 11% 18 months from now, and you’re capped out. It’s not terribly hard for the Nasdaq to go up 11% in a year and a half, especially from current levels.”

The maximum return on an annualized compounded basis is 14.11%.

“The cap is not too bad. But you can reach it too easily. I would give up some of the leverage and raise the cap,” he said.

“18 months from now, the market could rally. I’m not saying that it will but there’s a possibility that it may go up a lot. We already took a big hit since the beginning of the year. And we know how quickly the market can come back,” he said.

He was referring to the Covid 19-induced bear market of February-March 2020, which lasted a little over a month and paved the way for strong rebound up until November 2021, which saw the Nasdaq-100 index posting an all-time high.

Since then, the index has been in bear market territory. When the notes priced on June 29, the underlying closed 30.5% off its peak.

Another tradeoff

“I don’t want to miss what could be a ton of upside because of this cap,” he said.

“The leverage doesn’t add that much if you have a big uptrend. I may actually do better being long the index.”

While eliminating the cap over such a short tenor was probably not feasible, Doucette suggested raising it and decreasing the leverage.

“I’m better off taking a 1.2 or 1.5 x leverage with a higher cap. That way I wouldn’t be missing as much on the upside,” he said.

Doucette’s objection was limited to that direction of the market.

“I’m comfortable with the 10% buffer. I know I’m going to outperform on the downside no matter what.

“But I’m not as comfortable with the cap because I could be giving up too much,” he said.

Relief rally

In contrast, Matt Medeiros, president and chief executive of the Institute for Wealth Management, was much more concerned about the downside risk given the short maturity.

“Relative to where we are in this market cycle, I’m a little bit skeptical when people say we’re near the bottom. We just had a relief rally over the past four days. Is it going to last? Some say yes. They may be right, but honestly, I could take both sides of the argument. I can go either way.

“The fact that it’s a shorter-dated note doesn’t help me in that decision process.

“The tenor is too short. The buffer is too small,” he said.

Even if the structure offered more leverage and/or a higher cap or even a larger buffer, the terms would still not be compelling enough for this adviser.

“The note would have to be longer,” he said.

Headwinds

In addition, the global macroeconomic picture was not conducive of risk-taking, he noted.

“We still have a tremendous amount of global economic pressure, persisting inflation and with central banks tightening, the risks of a global recession are growing,” he said.

The U.S. markets have not shown a bright picture, he said.

“We just had the worst first half since 1970 in the stock market. Treasuries are having their worst first half too since 1973.

“I don’t know anyone right now who is bullish,” he said.

One benefit of the market downturn is that stock prices are not as overvalued as they were before, he noted.

“We’re pretty much near fair value. But there is no catalyst that could move up stock prices at this point.

“All the pullback means is that risk is a little bit lower than it was a year ago. But the risk of further declines is still high,” he said.

It’s about time

The buffer size was a concern for this adviser. But his main objection to the trade was the short maturity.

“Over time, you can get through most negative situations. But not in 18 months unless you have an anomaly like the 2020 pullback.

“I wouldn’t bet on it.

“With the systemic issues we’re facing from inflation to recession it doesn’t look like we’re heading toward the customary V-shape recovery,” he said.

Wells Fargo Securities LLC is the agent.

The notes settled on Tuesday.

The Cusip number is 47233JJR0.

The fee is 2.475%.

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