Here is a live example of a client that has been investing in Fixed Coupon Notes (FCNs) since last year.
Background
They had around $4m in their Macquarie accelerator and term deposits when they started. They were a novice investor, so we built up to $2.75m of total investment over time, which has an average yield of 11.8%pa.
Safety
The reference asset selection is based on an in-house risk system that takes into account Beta, historical volatility, 52-week range and backtested over 20 years data. The stocks must also meet minimum financial health scores.
Being on OTC Deal, we choose solid counterparties, with Macquarie, Morgan Stanley and Marex on the other side of the trades below, but since the start of 2025, we only deal with Citi, MQG and Morgan Stanley on the Fixed Coupon Notes as company policy for FCNs (too big to fail).
Assets are held in Clearstream for safekeeping (largest clearing house globally – $18trn), but in the event of any issues with the counterparty, Collateralised OTC deals like this are classified at the same level as Secured Creditors and rank above trade creditors, standard bonds, and Hybrids.
Now the client is used to the product, we only strike when opportunities come up (high VIX, lower prices) highlighted in red below.
As you can see, 13%-20%* is very achievable in quality stocks with a high margin of safety in the US or ASX (or combo)
*The 27% is an outlier, we struck on the 8th of April and VIX was 50+
guide to Switching Hybrids
Key Benefits of Fixed Coupon Notes
- Elevated cashflow. Franking isn’t realised till tax return is complete.
- Coupon not sensitive to BBSW.
- Risk is clearly defined from issuance.
- Ability to create new issuances daily. Zero-downtime between new investments. No Idle Cash.
- Adviser Fees included (1-2% per issuance)
- Lower Credit Risk than Hybrids (Senior Unsecured – Issued by A+ Rated issuers)
