Wall Street's FANG Notes for Mom and Pop Buckle on Tech Pain

(Bloomberg) -- Retail investors who have ridden the boom in technology companies via exotic bonds are facing a reality check.

With banks selling $2 billion of structured products linked to one or more of the now-struggling FANG members this year alone, investors are getting schooled on the risks lurking in complex debt securities -- even those laden with protective buffers.

They’ve already missed out on coupon payments and unless this month’s $2 trillion U.S. equity rout reverses course, investors face haircuts and more lost income.

It’s a snapshot of a vast market that offers steady returns for many investors seeking a defensive way to be bullish. But it underscores the violence of the tech sell-off that’s now even threatening holders of debt products designed to safeguard stock wipeouts of as much as 50 percent.

Wall Street's FANG Notes for Mom and Pop Buckle on Tech Pain

The hardest hit are structured securities tied to Nvidia Corp., with $221 million linked to the chipmaker sold globally this year alone. The timing couldn’t be worse: the stock is worth about half as much as it was at the start of last month after disappointing sales forecasts added to woes facing the sector.

Buyers of $3.42 million of Citigroup Inc. notes tied to the chipmaker, as well as to Micron Technology Inc. and Netflix Inc., look poised to miss a coupon payment this week. Nvidia’s trading below the threshold required to receive the touted 11 percent return per year.

Holders of $2.25 million of Credit Suisse securities are also in a bind. These investors won’t earn their December coupon unless the company recovers by some 20 percent.

Products linked to other tech high-fliers -- typically sold to retail investors via financial advisers -- are also under fire.

Citigroup sold $7.34 million of notes tied to Netflix in June when the shares were rocketing toward an all-time high. The six-month securities pay an annualized coupon of 13.75 percent as long as the streaming service remains above $308.32.

With the stock trading at $262 as of 11:00 a.m. in New York, investors would have received no coupon this month and risk losing at least a quarter of their principal when the notes mature on Dec. 28 -- unless Netflix stages a rally to the tune of 20 percent.

Holders of notes issued by Goldman Sachs Group Inc. that are linked to Facebook Inc., Amazon.com Inc. and Netflix also stand to forgo coupons unless there’s a robust equity rebound by January.

Representatives for Credit Suisse, Citigroup and Goldman Sachs declined to comment, or didn’t respond to requests for comment.

Wall Street's FANG Notes for Mom and Pop Buckle on Tech Pain

Buyers of all these notes sacrifice liquidity compared with the underlying stocks and give up their right to collect dividends. Still, strong retail demand for protective strategies to play the tech boom spurred Wall Street this year to quadruple issuance from the $500 million mark in 2017.

Losses can be less severe than for those who own the stocks outright, while in many cases the shares have plenty of time to rebound before maturity.

“A lot of these notes were sold with a feature which makes the downside a lot less painful,” said Arthur Teixeira, London-based managing partner at structured-product broker HPC Investment Partners. “They can recover, making the capital loss and mark-to-market value better.”

Investors are warned about the possibility of missing coupons in sales prospectuses, and so far the affected notes are a slice of the billions of dollars in such securities outstanding.

All the same, the missed payments highlight how the tech blow-out is reverberating beyond the equity market, with a rising count of potential victims.

©2018 Bloomberg L.P.