Barclays' reverse convertible linked to SunPower is risky despite high coupon, analyst says

By Kenneth Lim

Boston, June 8 - A reverse convertible linked to SunPower Corp. is a risky product despite a sizeable coupon, said structured products analyst Suzi Hampson of Future Value Consultants.

Barclays Bank plc plans to price a series of 20% annualized reverse convertibles due Sept. 16, 2009 linked to the common stock of SunPower.

Investors will receive par at maturity unless the underlying stock closes below 65% of its initial level during the life of the notes and finishes below its initial level. Otherwise investors will receive a number of SunPower shares equal to par divided by the initial level.

High coupon

The SunPower product offers one of the highest coupons among Barclays' recent reverse convertible offerings.

But that coupon reflects a significant amount of risk attached to the underlying stock, Hampson said.

"This is only a three-month product with a barrier of 65%, so it's obviously a pretty volatile stock to be able to offer that coupon with such a low barrier," she said.

Future Value gave the product a 2.73 overall rating out of a best possible 10, one of the poorer rated reverse convertibles that it has rated recently. That overall score comprises the firm's assessments of the product in terms of its value, return probabilities and its simplicity, with value and return being the more heavily weighted components.

"The value rating is quite low, at 2.26, but the main problem seems to be the return rating," Hampson said. "0.31 out of 10, which is not particularly high."

Significant risk

The return rating is an indicator of Future Value's opinion on the risk-adjusted potential returns from the product, and the firm estimates that there is a probability of about 41.4% that investors will lose more than 5% of their capital with the product, Hampson said.

"With such a low barrier, if the stock has fallen by 35% in three months, which it has to do for the capital to be at risk, the likelihood of it going back up to 100% by maturity is very low," she said.

But the risk for investors is not in terms of whether or not they could lose capital, Hampson noted. If investors do lose capital, chances are they will lose a substantial amount because the barrier is so low.

"If you lose capital, you're most likely to lose a significant amount," she said.

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