RBS offers a choice of kickouts

Autocallable products or kickout plans are aimed at investors seeking a pre-defined target return above the risk-free rate with the potential for early maturity. They are widespread in the UK, where they regularly account for the highest number of new trades of all product types. As autocallables have grown in popularity, issuers have made a wider range of terms and product features available to investors.

Royal Bank of Scotland has issued a series of four six-year autocallables linked to the FTSE 100 index. Each of the kickouts has a slightly different structure to the others and offers either higher returns or less risk, making the range suitable to more investors than a single offering.

The UK Growth Kickout Year 1+ Plan features a classic kickout structure that offers a potential return of 8% per annum (not compounded) if the FTSE 100 is equal to or higher than its initial level on any of the annual observation dates. At maturity, investors' capital is at risk if the American barrier of 50% is breached at any time during the product term.

The UK Growth Kickout Year 2+ Plan, like the 1+ Plan, has an autocall level of 100% of the initial investment, but it can only kick out from the second year onwards. The product offers investors a potential return of 7.7% per annum. Unlike the 1+ Plan, it features a European barrier of 50%, which is observed at maturity rather than on observation dates throughout the investment term.

The remaining two products feature annual call opportunities and American barriers at 50% of initial index levels. Autocall levels in these products are not set at 100% of the initial index level.

The UK Higher Growth Kickout Plan offers a potential return of 10% per annum (not compounded) if the FTSE 100 is equal to or higher than 105% of its initial level at any annual kickout date.

The UK Step-down Defensive Kickout Plan offers a potential return of 6.4% per annum - the lowest of the range - and features decreasing autocall levels. In order for the product to be called on its first anniversary, the FTSE 100 must be higher than its initial level. If it is not, the product enters its second year, when the index must be above 97% of its initial level to kick out, after which the autocall triggers continue to fall by 3% for each year the product is in force.

Of the four products, the lowest riskmap is that of the UK Step-down Defensive Kickout Plan. Defensive kickouts - whether they have falling trigger levels or triggers below 100% - are generally deemed to be lower risk than standard kickouts as there is a higher chance that the product will terminate early and, most importantly with regard to risk, provide a full return of capital. The defensive product is the only one of the range that can pay returns in the event of market declines of up to 15% on the final valuation date.

In general, the probability of kickout declines throughout the product term as the underlying index would have had to have been below the required level at the previous kickout. Of these four products, the one with the highest probability of kicking out is the defensive plan. The higher growth plan has the lowest overall probability of kicking out as the index must rise if it is to meet the call level, whereas it has only to remain the same or fall slightly in the other plans.

Pricing and risk

The nature of autocallables means they cannot be broken down into separate components. The value of these products depends on the return offered, the probability of achieving it and the downside risk. The probability calculations tell us that if the plan is to mature early it is more likely to do so during its early stages. Investors should also bear in mind the uncertainties of product maturity and re-investment opportunities. Returns are limited on the upside, and if the index performs well only the fixed return will be paid.

The risk associated with autocallables depends both on the likelihood that the product will mature early, repaying capital plus the specified return, and the risk to capital if the product reaches maturity. Three of the Royal Bank of Scotland products have American barriers, which are observed throughout the product term. The UK Growth Kickout Year 2+ Plan has a European barrier, which offers a higher level of protection for investors as it is observed only at maturity. By using a European barrier, a product will offer a lower return than would be the case with an American barrier, but the risk to investors' capital will also be lower.

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The information in this analysis is taken from sources which Future Value Consultants Limited deems reliable but no guarantee is made that the information is complete or accurate and it should not be relied upon as such. Any opinions in the analyses represent those of Future Value Consultants Limited at the time of writing but are subject to change. All valuations and prices shown are indicative only and do not imply an offer or commitment of any kind. The analysis does not constitute advice or recommendations nor should it be relied upon for any purpose. No liability whatsoever is accepted by Future Value Consultants Limited or Structured Products magazine for any loss or expense incurred from using this analysis.