Stock rebound may knock coupons down on reverse convertibles; RBC to price Starbucks-linked notes

By Sheri Kasprzak

New York, March 22 - The stock market has been making a recovery and that may mean bad news for sellers of reverse convertibles, at least according to one market source. The drop in volatility may also mean that new reverse convertibles are more likely to have smaller coupons.

"The higher the volatility, the higher the coupon," said one market source when asked about the impact of the improved stock market on reverse convertibles.

"Basically, you're stuck paying this gigantic coupon on a [reference] stock that isn't necessarily volatile anymore. It's not a given that this is the case. It depends on the particular stock and the particular sector but in the big picture, it could mean you're stuck paying this excessively big coupon on something that isn't even risk-heavy anymore.

"As to what will happen in the coming weeks, I think you may see fewer [reverse convertibles] with these coupons over 20% like you have the past few weeks. A lot depends on what happens next in the stock market."

In fact, on Thursday, stocks were little moved with the Dow Jones Industrial Average gaining 13.62 to close at 12,461.14 and the Nasdaq composite index dipping by 4.18 to settle at 2,451.74. The Standard & Poor's 500 composite index edged down half a point to close at 1,434.54.

But notably the Dow industrials jumped 159.42 on Wednesday after the Federal Open Market Committee meeting.

RBC's Starbucks-linked notes

Looking to particular reverse convertibles offerings, Royal Bank of Canada announced plans to price 8.75% reverse convertibles linked to the stock of Starbucks Corp.

The coupon is about in line with some other recent notes linked to the stock.

In early March, UBS AG announced plans to price reverse convertibles with a coupon of between 7.75% and 8.75% linked to the stock. Those notes are set to price March 26 and have a 75% trigger level.

Back in late February, Citigroup Funding Inc. priced $94.1 million in one-year Equity LinKed Securities linked to Starbucks. Those one-year securities had an 8% coupon.

The RBC notes pay par at maturity unless the stock falls below the 80% knock-in level and finishes below the initial share price. In that case, the notes pay a number of shares equal to $1,000 divided by the initial share price.

Barclays to price reverse convertibles

In other reverse convertibles offerings, Barclays Bank plc said it plans to price 10.55% notes linked to the stock of Norfolk Southern Corp.

The on-year notes pay par at maturity unless the stock falls below the 75% knock-in level and finishes below the initial share price in which case the notes pay a number of shares equal to $1,000 divided by the initial share price.

The notes are expected to price on March 27.

Earlier this month, ABN Amro Bank NV priced $1.8 million in 13.25% knock-in reverse exchangeables linked to Norfolk Southern. Those six-month notes pay par at maturity unless the stock falls below the 80% knock-in level and finishes below the initial share price. In that case, payout will be a number of shares equal to $1,000 divided by the initial share price.

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