Investors express renewed interest in yield and risk with bid for reverse convertibles

By Emma Trincal

New York, Oct. 5 - Prominent interest in reverse convertible notes marked that past week of issuance in structured products, according to data compiled by Prospect News.

With $71 million priced in 14 deals, trigger reverse convertible products accounted for 41.4% of the week's $170 million total issuance, according to the preliminary figures. Deals providing leveraged return with partial downside protection were the second among deal categories, with 19.54% of the total in 10 deals, also suggesting that investors are willing to take on more risk.

Principal at risk

"We're seeing a change in market view. Until this month or a month ago, principal protection was the key theme. There was a huge interest in certificates of deposits. But now investors are starting to look at principal at risk products," said Serge Troyanovksy, head of distribution, North America at BNP Paribas.

"After September 2008, issuance of reverse convertibles dropped significantly. But reverse convertibles have always been a type of securities inherently well liked by investors.

"Now we're seeing a regained interest given this market characterized by low interest rates and stock gains. Reverse convertibles allow investors to extract additional yield and to tap into the upside opportunities of a market in rebound stage. I think both factors - yield and return potentials - are what is driving interest in reverse convertibles right now."

High coupons

Big coupons characterized many of the week's offerings in structured products.

On Wednesday, Credit Suisse Nassau Branch priced $6.73 million of 10.5% callable yield notes due April 5, 2010 linked to the Russell 2000 and S&P 500 indexes. Interest is payable quarterly. The notes are callable at par plus accrued interest on any interest payment date beginning Dec. 5, 2009. If the notes are not called, the payout at maturity will be par unless either index falls to or below its knock-in level - 70% of its initial level - during the life of the notes, in which case investors will receive par plus the return of the worst-performing index, up to a maximum payout of par.

On the same day, Credit Suisse priced two similar deals: one was the $4.09 million sale of 7% callable yield notes due Oct. 5, 2010 linked to the Russell 2000 and S&P 500 indexes; and the other was a $3.49 million new issue of 11% callable yield notes due Oct. 5, 2010 linked to the Russell 2000 and S&P 500 indexes.

On Monday, Barclays Bank plc priced $1 million of 19% reverse convertible notes due Dec. 31, 2009 linked to Lincoln National Corp. shares.

The payout at maturity is par in cash unless Lincoln National shares fall below the protection price of $16.76, 65% of the initial price of $25.78, during the life of the notes and finish below the initial price in which case the payout will be Lincoln National shares equal to $1,000 principal amount divided by the initial price.

On Tuesday, Royal Bank of Canada priced a deal characterized by an unusually high coupon: the $0.454 million sale of 30% reverse convertible notes due Dec. 31, 2009 linked to Las Vegas Sands Corp. shares.

The payout at maturity will be par in cash unless Las Vegas Sands shares fall below the protection price of $11.44, 65% of the initial price of $17.60, during the life of the notes and finish below the initial price in which case the payout will be Las Vegas Sands shares equal to $1,000 principal amount divided by the initial price.

Another important reverse convertible issuer last week was Eksportfinans ASA, pricing several deals via underwriter Wells Fargo Securities, LLC, including $6.4 million of 17.5% annualized enhanced yield securities due April 5, 2010 linked to the common stock of Chesapeake Energy Corp.

Chase for yield

"Appetite for risk is returning to the market big time," said Sasha Rozenberg, product manager at derivatives technology company SuperDerivatives.

"I thought that the game was over or that it would take a little bit longer for people to take on that type of risk. But I guess, here we are," he said.

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