Stock decrement indices
An equity decrement index is a version of an index or stock where the dividend stream is replaced with a fixed dividend amount which is subtracted from the total return version of the asset at a constant predefined rate. Decrement versions of major indices have been popular underlyings for structured products for some time and their rise is well documented. In this piece we will instead focus on the new trend for linking structured products to decrement versions of a single stock. The term Single Stock Decrement Index may itself cause confusion as many would expect an index to be comprised of multiple underlyings. The underlying in this case is the single stock with a change in dividend calculation. Because this must be calculated accurately and transparently under Benchmark Regulation (BMR) it is defined as an index.
A table of products live on the structuredretailproducts.com (SRP) database linked to single decrement indices by country breakdown is shown below.
| Country | Product issuance | Sales volume (USDm) |
| France | 62 | 555.53 |
| Italy | 9 | 10.16% |
| Finland | 2 | 7.96% |
| UK | 2 | 4.94% |
Table 1: Products linked to single stock decrement indices as at 17 May 2022. Source www.structuredretailproducts.com
France is the clear market leader for products linked to these underlyings and decrement indices are very popular in France. Of the top 15 underlyings by sales volume, over half of them are decrement versions of traditional indices or funds.
| Underlying | Product Issuance | Sales Volume (EURm) | Market Share |
| Eurostoxx 50 | 190 | 1682 | 11.9% |
| Solys Quadrant Europe Fund | 31 | 978.01 | 6.92% |
| SBF Top 50 ESG EW Decrement 50 Points | 43 | 906.21 | 6.41% |
| Eurostoxx Banks | 45 | 489.9 | 3.47% |
| iEdge ESG Transatlantic Water EW 50 Decrement 5% NTR Index | 3 | 343.7 | 2.43% |
| S&P Euro 50 Equal Weight 50 Point Decrement Index (Series 2) | 27 | 266.4 | 1.89% |
| Solys Euro Evolution I Fund | 14 | 265 | 1.88% |
| Orange | 176 | 241.43 | 1.71% |
| Ethique Independance et Gouvernance Responsable France 30 Decrement 5% | 3 | 240 | 1.7% |
| Euro iStoxx Banks GR Decrement 50 Series 2 Index | 28 | 234.38 | 1.66% |
| Credit Agricole | 152 | 231.4 | 1.64% |
| Stellantis | 298 | 223.99 | 1.59% |
| iSTOXX Europe 600 Energy ex Coal GR Decrement 50 EUR Index | 24 | 200.45 | 1.42% |
| Euro iStoxx 50 GR Decrement 3.75% Index | 2 | 200 | 1.42% |
| Solactive France 20 Equal Weight NTR 5% AR Index | 19 | 194 | 1.37% |
Table 2: Top 15 underlyings in France in 2022 by sales volume. Source www.structuredretailproducts.com
The most frequently used decrement single stock underlying in France is the iStoxx ORA GR Decrement 0.7 EUR Index although it has no products striking in the last two months. Of the products striking in May, two are linked to iEdge Credit Agricole SA Decrement 0.8 EUR GTR Series 1 Index and the other two to decrement versions of ENGI and FP. These two indices rank at 21 and 110 respectively. It can also be seen that Credit Agricole stock itself is at number 11 on the list.
The products linked to single decrement indices in France are similar in choice of product type to conventional equity linked products in that market. All of the live products in this category listed on SRP have autocall features and either pay a snowball style coupon or income with or without memory. In addition, they are all at risk products and linked to either one or a basket of decrement stock indices with the payoff depending on the worst performing of the basket.
The iEdge Credit Agricole SA Decrement 0.8 EUR GTR Series 1 Index is calculated daily using the total return performance of Credit Agricole SA and deducting a daily accrual of the synthetic dividend set at 0.8 Euros. As at 17 May 2022, the closing level of the stock was 10.53 which means the fixed dividend represents 7.59% of the current stock price. The average actual dividend yield for this stock over the past five years is approximately 5%. However, this includes the year 2020 where a much smaller divided was announced in common with many other companies. The decrement amount is set at a comparable level to what might be expected given the historic dividend yield of the stock. Rather than significantly changing the return expectations of an underlying it is designed to reduce hedging risks that the investment bank faces.
| Announcement date | Ex-dividend date | Gross dividend (EUR) | CA stock price (EUR) | Dividend yield |
| 10/02/2022 | 30/05/2022 | 0.85 | 14.154 | 6.01% |
| 11/02/2021 | 18/05/2021 | 0.8 | 10.725 | 7.46% |
| 14/02/2020 | 31/05/2022 | 0.2 | 13.49 | 1.48% |
| 14/02/2019 | 24/05/2019 | 0.69 | 9.8 | 7.04% |
| 14/02/2018 | 43242 | 0.63 | 13.57 | 4.64% |
Table 3: Dividend payments for Credit Agricole. Source: Refinitiv
Over the past two years dividend levels have been extremely unpredictable and variable because of the pandemic and the resulting economic uncertainty. Therefore using decrement indices as underlyings in structured products has become much more popular because it removes the dividend uncertainty. Without the use of a fixed dividend, issuers are likely to try to mitigate dividend risk by assuming a lower implied divided level when pricing products and therefore offering lower headline rates. The advantage for investors therefore should mean better terms on structured products linked to these underlyings. The recent increase in decrement indices for single stocks is also logical because the uncertainty around dividend payments for a single company is necessarily higher than for a diversified index with companies from different sectors.
Linking a structured product to a decrement index rather than the stock itself undoubtedly adds complexity. However in the French market at least, decrement indices are now so popular that the introduction of the same concept applied to stocks can be judged a useful innovation.
Tags: Structured EdgeA version of this article has also appeared on www.structuredretailproducts.com
Image courtesy of: markus spiske / unsplash.com
