RBC could offer buffered reverse convertibles; buffers offer cushion in volatile times, adviser says

By Kenneth Lim

Boston, Dec. 2 - Royal Bank of Canada could offer buffered reverse convertibles, according to a 424B5 prospectus supplement filed with the Securities and Exchange Commission.

The move would add to other buffered products that are coming amid uncertainty about the equity markets and a desire for better protection, an investment adviser said.

RBC plans buffered reverse convertibles

RBC could offer buffered reverse convertibles that add a twist to the typical reverse convertible structure.

A typical reverse convertible, which usually bears a coupon, will return par at maturity unless the underlying falls below a barrier level during the life of the note and finishes below its initial level. If both those conditions are met, however, investors will receive a number of shares of the underlying equal to par divided by the initial share price.

The RBC buffered reverse convertible will return par at maturity unless the underlying finishes below the barrier price. In that case, investors will receive a number of shares of the underlying equal to par divided by the initial share price plus an amount in cash equal to the principal amount times a buffer amount.

Barclays also adds buffer

Barclays Bank plc also recently added a buffer feature in a number of zero-coupon covered call notes.

At maturity, if the underlying fund's share price is above its initial level, holders of the Barclays notes will receive par plus a call premium percentage. If the underlying fund ends flat or below its initial level, investors will receive par plus the underlying return plus the call premium percentage.

Buffers provide insurance

The buffers are valuable to investors who are concerned about the highly volatile markets, the investment adviser said.

"As the term suggests, a buffer provides some allowance for error," the adviser said. "That's especially valuable in point-to-point products like reverse convertibles when volatility is high. When volatility is high, short-term deviations are bigger, which means that the risk of a product breaching its protection levels are higher. I might think a stock is likely to go up slightly over the next year, so I'd be interested in a product that allows me to take advantage of that trend. But because volatility is so high, I need something that gives me some protection in case the stock doesn't go up enough or if a short-term decline affects the final price. With a buffer, you get that extra 10%, 20%, whatever it is cushion."

Structure could boost reverse convertibles

The structure could help to make reverse convertibles more attractive, the adviser said.

"Right now I'm not doing too much reverse convertibles," the adviser said. "The ones with interesting coupons are too risky, and even those that have low coupons are still risky. I'd be interested in seeing how these will price. Maybe they'll put reverse convertibles back on the radar."

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.