Reverse convertibles 'great product for right customer,' market insider says; Barclays plans deals

By LLuvia Mares and Sheri Kasprzak

New York, Oct. 24 - Reverse convertibles are rampant in the market right now. Long praised for being income-producing offerings, one market insider said the securities are perfect for the right investors.

"I think it's a great product for the right customer," said one market specialist Wednesday. "We are active ourselves in reverse convertibles."

On Wednesday, Barclays Bank plc said it will price in a couple of days an offering of 12.25% reverse convertibles linked to Mylan Laboratories Inc.

The investment bank also said Wednesday it will price 15.25% reverse convertibles linked to Noble Corp. and 11.5% notes linked to Qualcomm Inc.

In other news Wednesday, commodities have been prevalent in the marketplace and one market source said investors are eager to use the underlyer as a way to diversify their portfolios.

"For investor interests, commodities will continue to be big just in terms of there are more people using it as a portfolio diversifier and that is really how it is being positioned," he said.

"What will really drive sales one way or the other, obviously, is the performance of commodities in general and that probably has a lot to do with world economic conditions and demand. I think that they are really being accepted by a lot of advisors as being sort of an asset class that can provide significant diversification benefits.

"Part of the value of structured products is really making that asset class that was once really hard to invest in, accessible and, in some cases, I would say [exchange-traded funds] and [exchange-traded notes] are also responsible."

Commodities diversify despite volatility

In the world of ETNs, Barclays priced $250 million of each of eight issues of iPath exchange-traded notes - long lauded for their transparency - linked to commodity indexes. The notes cover the Dow Jones - AIG Agriculture Total Return sub-index, the Dow Jones - AIG Copper Total Return sub-index, the Dow Jones - AIG Energy Total Return sub-index, the Dow Jones - AIG Grains Total Return sub-index, the Dow Jones - AIG Industrial Metals Total Return sub-index, the Dow Jones - AIG Livestock Total Return sub-index, the Dow Jones - AIG Natural Gas Total Return sub-index and the Dow Jones - AIG Nickel Total Return sub-index.

"What structured products can kind of bring to the game is giving somebody the right risk-reward combination that they are comfortable with," added the market source. "So a lot of people still perceive commodities to be very volatile even though they are supposed to play a diversification type role in a portfolio."

Looking to particular commodities deals, AB Svensk Exportkredit priced, through Morgan Stanley, $150 million in floating-rate exchangeable notes linked to the Dow Jones - AIG Commodity Index Total Return.

Terms of Barclays Mylan-linked notes

Moving back to those reverse convertibles from Barclays, the three-month Mylan-linked notes pay an annualized coupon of 12.25% and pay par at maturity unless the stock falls below the 75% knock-in level during the life of the notes and ends below the initial share price.

Should that happen, the notes pay a number of shares equal to $1,000 divided by the initial share price.

The deal is set to price on Oct. 26.

The Noble- and Qualcomm-linked notes are also set to price Oct. 26. Those notes have similar terms. The knock-in level for both the Noble and Qualcomm notes is 80%.

Terms of Svensk's commodity index notes

Heading back to commodities, Svensk negotiated the terms, through Morgan Stanley, for $150 million in floating-rate exchangeables linked to the Dow Jones - AIG Commodity Index Total Return.

The notes pay interest at three-month Libor plus 20 basis points for the first year. Beginning Oct. 25, 2008, the interest will equal one-month Libor plus 20 basis points.

Payout at maturity will be par of $100,000 plus triple the index return, minus a fee of 0.25% per year and minus the Treasury bill yield, which will be determined, based on the 91-day weekly auction high rate for U.S. Treasury bills.

The notes are putable any time and will be automatically called if the index declines by 10% or more.

Lehman prices $3.65 million in synthetic convertibles

Elsewhere, in a type of offering that has been popping more often lately, Lehman Brothers Holdings Inc. priced $3.65 million in 2.4% synthetic convertibles linked to Icahn Enterprises LP.

The notes were priced at 112 for proceeds of $4.088 million.

Each note is convertible into 6.2578 shares at $159.8001 each, a 23.56% premium over the $129.33 execution price.

Payout will be par plus any increase in the share price over the conversion price. The redemption amount will be payable in cash or Icahn shares, at Lehman's option.

The notes will be callable beginning Oct. 23, 2010.

Earlier this month, Lehman priced $20 million in 1% synthetic convertibles linked to Intel Corp.

Each of those notes is convertible into 36.446735 Intel shares, equal to a conversion price of $27.4373 each.

Payout at maturity is par plus any increase in the share price over the conversion price. The redemption amount will be payable in cash or Intel shares, also at Lehman's option.

The notes become callable beginning Aug. 10, 2010.

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