Fortis 25.5% reverse convertibles linked to 'Small Dogs' appeal due to fewer stocks, distributor says

By Sheri Kasprzak

New York, April 9 - Even though there are some similarities to the Dogs of the Dow structure that JVB Financial came up with last year, a new structure developed by JVB for Fortis Bank may be more appealing to investors, said Steve Peters of JVB Financial Group, LLC.

On Wednesday, Fortis announced it will sell 25.5% reverse convertibles linked to a basket of the five lowest-priced stocks of the Dow Jones Industrial Average.

"We were the ones that thought up that structure [the Dogs of the Dow] and they [HSBC USA] had a big success with it last year," Peters said in an interview Wednesday.

"We thought if we can ever get to where we can get it to show five instead of the 10 [reference stocks] lowest priced stocks and if we can get plenty of downside protection, then there are only five chances instead of 10 that the stocks will go down.

"We were also eager to have a little better coupon than HSBC. Each issuer is going to have a different bid and there are different risks on different bids. Five names is a lot stronger than 10 and we have a higher put premium. That's what it's all about - a higher put premium."

Notes have six-month term

The notes, which have a six-month term, are linked to the stocks of Pfizer Inc., Citigroup Inc., Verizon Communications Inc., Merck & Co. Inc. and General Motors Corp.

Peters said linking to these names now is advantageous given the current market conditions.

"We believe it's better timing now," he said. "It could be good timing for these, particularly with a Citigroup, which has gotten beaten up big time over the last six months. And you've had the credit crunch. The timing is good, particularly with 50% downside protection."

Another benefit of the notes is the short tenor, Peters noted.

"We like the fact that there's 50% [downside] protection and it's only for six months," he said.

"It's better than a one-year structure. From what we hear, the broker-dealers tell us if they're going to take this risk, they want to take it for the shortest period possible."

Terms of the sale

The 25.5% knock-in reverse convertibles are expected to price on April 25, according to a preliminary prospectus released Wednesday.

The bonds pay par at maturity if the final price of the worst-performing stock is equal to or greater than its initial price at maturity. The investors will also receive par at maturity if the worst-performing stock is equal to or greater than the 50% knock-in level at maturity. If the final price of the worst-performing stock is less than or equal to the knock-in level on any trading day, the investors will receive par divided by the initial stock price of the worst-performing stock.

HSBC plans Dogs of the Dow-linked notes

The Small Dogs offering comes just a day after HSBC USA Inc. said it intends to price reverse convertibles linked to the worst performer of the Dogs of the Dow.

Those notes have a 25% coupon and also have a six-month term.

The notes are linked to some of the same notes as the Small Dogs structure - Bank of America Corp., Citigroup Global Markets, AT&T Inc., Pfizer Inc., JPMorgan Chase & Co., Merck & Co. Inc., General Electric Co., Verizon Communications Inc., General Motors Corp. and E.I. Du Pont de Nemours & Co.

At maturity, the investors will receive par at maturity unless any of the underlying stocks trades 50% below its initial value and any of the underlying stocks finishes below its initial value. If that should happen, the payout at maturity will be the number of shares of the worst-performing stock equal to $1,000 divided by its initial price.

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