Structured-note investors are making their biggest bets on Silicon Valley companies from Apple Inc. (AAPL:US) to Zynga Inc. (ZNGA:US) in at least four years as banks seek out more volatile companies to boost yields.
Lenders have sold $566.4 million of notes linked to shares of 28 technology companies so far this year, according to data compiled by Bloomberg. The securities, which combine debt with derivatives to offer customized bets, generally pay interest and can lose value if the stocks plummet from their initial prices.
Internet companies such as Facebook Inc. (FB:US) and Netflix Inc. (NFLX:US) have rapidly changed their business models to focus on mobile platforms like phones and tablets, increasing their volatility, said Ben Schachter, an analyst at Macquarie Securities USA Inc. in New York. Notes tied to more volatile companies can offer higher potential gains because of the risk of greater loss.
“The business models are shifting and changing all the time,” Schachter said in a telephone interview. “It’s happening so quickly we’re not exactly sure yet how the evolution will impact some companies.”
The businesses popular with structured-note investors range from Cisco Systems Inc. (CSCO:US), the world’s biggest maker of network routers and switches, to Google Inc., operator of the world’s biggest search engine. Investors who use Microsoft Corp. (MSFT:US)’s Office software at work and then goof off with Zynga’s “Farmville” game in the evening can buy debentures linked to both software makers.
Many of these companies use increasingly sophisticated data and targeted advertising, betting they can boost profits through people spending more time on the Internet, Schachter said.
“If you ask anyone, ‘Are you going to use the Internet more or less in future?’ obviously, it’s the way people are going,” he said.
Apple, the world’s largest company by market value, and Facebook, owner of the world’s biggest social network, lead sales of the securities this year with $190.3 million for the two combined, Bloomberg data show.
UBS AG (UBS:US) sold the largest offering tied to the companies this year, a $39.5 million note tied to Google on Feb. 11, Bloomberg data show. The seven-year callable securities, which don’t pay interest, return a profit when the search company rises more than 29.5 percent from its initial value of $1,183.30, according to a prospectus filed with the U.S. Securities and Exchange Commission. All principal is protected unless the bank defaults.
With the interest in newer technology have come securities tied to companies that are new to the structured notes market, Bloomberg data show.
Barclays Plc (BARC) sold $3.51 million of one-year notes tied to Zynga, the first such U.S. offering. The securities, issued March 7, yield 11.26 percent as long as the stock doesn’t exceed its initial price of $5.58 on quarterly observation dates, in which case the notes are called, according to a prospectus filed with the U.S. Securities and Exchange Commission. Investors get their money back at maturity unless the stock falls below 70 percent of the starting price.
Banks sold $345.7 million of notes tied to the technology companies in 2011, the next-biggest year for sales, Bloomberg data show. The sales period goes through March 14.
Vanessa Chen, a spokeswoman for Facebook, Tim Drinan of Google, Dani Dudeck of Zynga, Robyn Jenkins Blum of Cisco, and Kristin Huguet of Apple declined to comment on the securities. Tony Imperati, of Microsoft’s outside public relations agency Waggener Edstrom Inc., declined to comment. Jonathan Friedland of Netflix didn’t return messages seeking comment.
Mark Lane, a spokesman for Barclays, declined to comment. Megan Stinson, of UBS, didn’t return an e-mail seeking comment.
Banks create structured notes by packaging debt with derivatives to offer customized bets to retail investors while earning fees and raising money. Derivatives are contracts with values derived from stocks, bonds, commodities and currencies, or events such as changes in interest rates or the weather.
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