Reverse convertibles thrive despite stock market crunch; Barclays prices slate of notes

By Sheri Kasprzak

New York, Jan. 30 - Despite the recent slumps in the stock market, a large slate of reverse convertibles priced this week and market insiders said Wednesday they believe the product still has a reasonably secure future.

"It's really hard to say if there will be a decrease," said one insider.

"I suppose it's possible that the knock-in levels could be hit, but I think most investors go in knowing that's a possibility. I don't necessarily think investors will stop investing in reverse convertibles. And if the market gets really volatile, that's especially good for coupons, so the natural result is you've got riskier reference stocks, but bigger coupons."

Another market source said he feels investors are still comfortable enough with the reverse convertibles.

"They are very aware of market slumps," he said. "There's always a chance, even in a fairly good market, for a stock to hit the trigger."

Reverse convertibles priced

A rather large number of reverse convertibles have popped up in the market this week, including a number priced by Barclays Bank plc.

The standout reverse convertibles included 20% notes linked to United States Steel Corp., AK Steel Holding Corp. and Hansen Natural Corp.

All three of the notes have a three-month term and pay par at maturity plus the coupon, assuming the final share price is lower than the initial share price and the stock never falls below the knock-in level during the life of the notes.

If either of these things happens, the notes pay a number of shares equal to $1,000 divided by the initial share price.

Barclays priced $2.25 million in notes linked to U.S. Steel. Those notes have a 75% knock-in level.

The investment bank also priced $2.5 million linked to Hansen with a 70% knock-in level and $1.5 million in notes linked to AK Steel with a 70% knock-in level.

There were other notes priced recently with reasonably large coupons, including a $3.25 million note linked to Las Vegas Sands Corp. with a 75% knock-in level, a $2.5 million note linked to Energy Conversion Devices, Inc. with a 60% knock-in level and $1.75 million in 18.5% notes linked to Bucyrus International, Inc. with a 70% knock-in level.

The notes also included $1.5 million in notes linked to Amazon.com, Inc. with a 70% knock-in level and $2.25 million in 17.25% notes linked to Southern Copper Corp. with a 70% knock-in level.

JPMorgan's notes

JPMorgan Chase & Co. has also been busily pricing reverse exchangeables with fairly large coupons.

The bank priced $10,000 in 18% exchangeables linked to US Airways Group, Inc., with a protection level of 50% of the initial share price. The initial share price is $13.33.

JPMorgan priced $57,000 in 18.5% notes linked to NutriSystem, Inc. with a 50% protection level. The initial share price is $24.72, according to an Securities and Exchange Commission filing from Wednesday.

Both notes have a one-year term and pay par plus the coupon at maturity unless the stock falls below the initial share price during the life of the notes and drops below the knock-in level.

Barclays' Asian and Gulf-linked notes

Elsewhere at Barclays, the bank plans to price Asian and Gulf Currency Revaluation Notes, which includes five Asian and Middle Eastern currencies, according to a prospectus filed Wednesday with the SEC.

The strategy includes the Chinese yuan, the Hong Kong dollar, the Saudi Arabia riyal, the Singapore dollar and the United Arab Emirates dirham. The strategy reflects the total return, including both exchange rate movements and implied local deposit rates, of U.S. dollar investments in the reference strategy constituent currencies.

"It's an interesting strategy," said one market source not connected to the offering.

"Investors have been looking at Middle Eastern currencies a little more, though it does seem like a fairly new thing to structured products. I don't think they're any riskier than some of the Asian currencies or the Latin American currencies. It's an interesting mix of developed and EM, so that is what makes it most interesting to me."

The notes pay a cash payment per security equal to the closing indicative value on the final valuation date. The closing indicative value is calculated on the inception date as $50. On each subsequent calendar day through maturity or early redemption, the value will equal the closing indicative value on the immediately preceding calendar day times the daily index factor on that calendar day, minus the investor fee.

The investor fee, calculated daily, is 0.89% per year times the daily index factor. The daily index factor is equal to the closing level of the reference strategy on that business day, divided by the closing level of the reference strategy on the immediately preceding reference strategy business day.

UBS prices two linked to S&P 500

Elsewhere, UBS AG priced two offerings of notes linked to the S&P 500 index.

The bank priced $78.23 million in principal-protected absolute return barrier notes with a one-year term.

The notes pay par plus the principal amount times the absolute return, assuming the underlying index never closes above the upper index barrier of 1,594.30 or below the lower barrier of 1,113.64.

The initial index level is 1,353.97, and the absolute return barrier is 17.75%.

The notes priced Monday, according to an SEC filing released Wednesday.

The investment bank also priced $22.81 million in return optimization securities linked to the index.

The 18-month notes pay par plus the principal amount times the 25.10% maximum gain at maturity if the index return is equal to or greater than the maximum gain.

If the index return is positive, but less than the maximum gain, the investors receive par plus the principal amount times three times the index return, subject to the maximum gain.

If the index return is zero or negative, the investors receive par plus the principal amount times the index return. If this should happen, investors may lose all or a portion of their investment.

The initial index level is set at 1,353.97.

© 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.