Monthly Archives: July 2019

As reported by Bloomberg on July 16, 2019, a $693 million loan that Clover Technologies took to the market just 5 years ago recently lost about a third of its value. This collapse was surprising to insiders who trade corporate loans.

Clover had been operating since 1996 when it was acquired by Golden Gate which followed an usual path of private equity buyouts – it piled debt on the underlying company to extract dividends.

Using the leveraged loan market as a wallet, the company took loans that funded dividend payments totaling at least $278 million – $100 million in 2013 and $178 million in 2014. Clover also asked lenders for a further $100 million in 2014 to pay for an acquisition.

Those loans, as is typically done, were bought mostly by mutual funds and collateralized loan obligations (“CLOs”), which bundle such leveraged debt into higher-rated securities that are pitched to more risk-averse investors.

There’s been little trouble finding buyers for CLOs in recent years. With yields on high-grade bonds at low rates across the globe, investors have been hungry for the juicy returns that these loans offer and, more and more, tend to overlook the lack of protection afforded.

Although Clover’s loan isn’t large by Wall Street standards, its decline set off alarm bells that regulators have been sounding for months. In a market where trading can be thin – and at a time when illiquidity is suddenly becoming a prominent concern in credit circles – the episode shows how loans to highly leveraged companies can quickly implode when fortunes change.

If you are an individual or institutional investor who has any concerns about your leveraged loan investments with any brokerage firm, please contact us for a no-cost and no-obligation evaluation of your specific facts and circumstances. You may have a viable claim for recovery of your investment losses by filing an individual securities arbitration claim with the Financial Industry Regulatory Authority (FINRA).

On July 1, 2019, in Regulatory Notice 19-21, the Financial Industry Regulatory Authority (“FINRA”) announced that it was establishing higher strategy-based margin requirements for exchange-traded notes (“ETNs”) and options on ETNs in light of the complex nature of these products and their attendant risks.

An ETN is an unsecured obligation of its issuer, typically a bank or other financial institution. However, ETNs are different from typical corporate bonds as, for example, they do not pay interest and pay principal based on the performance of a reference index or benchmark.

For this reason, an investment in an ETN can have a return similar to an investment in an exchange-traded fund (“ETF”) that is designed to track the performance of the index or benchmark referenced by the ETN.

Though these products are also structured products that trade on an exchange, they differ in a few respects. For example, ETFs are generally equity products: an investor in an ETF, which is typically a registered investment company, owns shares of a fund, which represents an ownership interest in an underlying portfolio of assets. In contrast, as noted above, ETNs are unsecured debt that do not reflect ownership of an underlying portfolio of assets.

This feature exposes holders of an ETN to the creditworthiness of the issuer in addition to the risk of the reference index or benchmark.

ETNs may also have “knock-out” features or give their issuers early redemption rights, which can cause the return on an ETN investment to further diverge from the return on an investment in an ETF that tracks the same index.

The Securities & Exchange Commission has identified several potential risks of investing in ETNs which include the following:

Complexity – You and your broker should take time to understand the manner in which the reference index or benchmark is calculated, including the fees that are included in either the reference index or the calculation of the value of the ETN. Compare and contrast the ETN to other investment products offering a similar investment strategy.

Credit Risk (Issuer Default) – You should be aware that when you purchase an ETN you are subject to the creditworthiness of the issuing financial institution and would be a creditor if the issuer defaults on payments due.

Market Risk – In addition to the credit risk of the issuer, ETNs also expose investors to the performance risk of the reference index or benchmark.

Leverage – Leveraged, inverse, or inverse-leveraged ETNs reset on a daily basis their exposure to the leveraged, inverse, or inverse-leveraged exposure stated in the prospectus, meaning that all investors receive an equal amount of leveraged, inverse, or inverse-leveraged exposure. As a result, investors holding such ETNs for more than one day should not expect to receive returns proportional to the exposure stated in the prospectus. The difference can be significant. Consequently, leveraged, inverse, or inverse-leveraged ETNs are not typically used as buy-and-hold instruments.

Price Volatility (Market Price versus Indicative Value) – ETNs can trade at premiums or discounts to their indicative value, especially in instances in which the issuer has suspended further note issuances. If you are considering purchasing ETNs, you should compare market prices against indicative values.

Liquidity Risk – There is a risk that if you need to cash out your investment, you may not be able to sell the ETN immediately and at a price that you would consider reasonable (for example, you may have to sell the ETN at a lower price than if you were able to wait to liquidate your investment). This is the case for most illiquid securities and the liquidity of ETNs varies significantly. For example, some ETNs have daily volume in excess of a million notes, while others may have little trading activity over several days. You should consider your overall timeframe for the investment, including how quickly you may need to sell the ETN.

If you are an individual or institutional investor who has any concerns about your exchange-traded note (ETN) investments with any brokerage firm, please contact us for a no-cost and no-obligation evaluation of your specific facts and circumstances. You may have a viable claim for recovery of your investment losses by filing an individual securities arbitration claim with the Financial Industry Regulatory Authority (FINRA).