Lehman's least-performer product seen aggressive; Svensk's long banks-short financials deal needs study

By Kenneth Lim

Boston, Feb. 15 - Lehman Brothers Holdings Inc.'s reverse exchangeable notes linked to the least performing stock in a basket is an unusual take on a common structure and requires a fairly aggressive view, says analyst Tim Mortimer of Future Value Consultants.

"There are many reverse convertibles out there, but not very many that are linked to more than one underlying stock, and here you take the risk on the worst one," Mortimer told Prospect News.

Lehman is offering a series of 18.75% to 20.2% one-year reverse exchangeable notes linked to the least performer among the common stock of General Electric Co., Intel Corp. and the Walt Disney Co. The notes will pay par at maturity unless the final share price of the least performing stock is less than its initial price and falls below the trigger price. If the trigger event occurs and the underlying share price ends below the initial price, the payout will be a number of shares of the underlying equal to par divided by the current stock price.

In a research report, Future Value highlighted the notes' high fixed coupon as "well above the risk-free rate," but cautioned that investors could lose principal.

"If the barrier has been breached then the worst performing of the stocks needs to finish above 81.25% -79.8% of its initial value in order to avoid a loss on a total return basis," the report stated.

"Whether or not the barrier is breached is clearly critical to the performance of this investment. If the barrier of 80% is breached then a loss of 20% would occur if the stocks remained unchanged until the end of the investment. The stocks would then all have to finish above the 100% level in order to avoid principal loss."

The product should be interesting for the retail market, the report noted.

"This type of product lends itself well to short investment terms typical of U.S. structured products," the report said. "This is because coupon rates that can be offered are generally higher for shorter maturities. Most reverse convertible products available on the market are linked to a single underlying but some, like this product, offer more interesting structures based on multiple equities. Reverse convertibles products would appeal to investors looking for interest above the risk free rate who can risk loss to their principal. The familiarity and reasonably simple structure of the product could offer further appeal to a less sophisticated investor."

Mortimer added that the Lehman product was also unusual because its underlying stocks lie across a wide spectrum.

"The choice of stocks is quite interesting," Mortimer said. "We've got technology like Intel, [engineering conglomerates] like General Electric and media like Walt Disney."

Mortimer said the impact of adding more underlying stocks to a reverse convertible structure depends on which stocks are added.

"This particular product is about midway of all these products that you see recently, so it's not that much riskier than a lot of others," Mortimer said.

The Lehman offering targets "investors who are looking for very high income investments, but also it comes with a fair degree of risk," he said.

"It takes a pretty aggressive view of the underlying," he explained. "If you do your research, and you get your view right, you could be rewarded very well, but if you get it wrong, you could get wiped out."

Svensk's long-short needs research

AB Svensk Exportkredit's planned 0% outperformance notes due 2009 linked to a long position in the S&P 500 Banks Index and a short position in the S&P Financial Select Sector index via Goldman, Sachs & Co. is unusual not just because of its long-short structure but also the overlap between the strategies, Mortimer said.

"In this case there's a bit of an overlap between the long and short strategies," said Mortimer, who noted that the long index appears to have more retail banks than the short index. "You'll need to do your research well."

The notes will pay par plus the difference between the two index returns if the long index outperforms the short index. If the long index underperforms the short index, the payout at maturity will be par minus the difference between the two indexes.

"If you think the banks are going to do well, but you are worried about the financial select sector popping, you might be interested in this," Mortimer said.

Lehman's Optas offer access

Lehman's newly launched Opta exchange-traded notes are tapping the flavors of the month and offering investors access to their underlying assets, Mortimer said.

Lehman on Thursday launched $750 million of 30-year 0% Opta exchange-traded notes, comprising three series. One series is linked to the Lehman Brothers Commodity Index Pure Beta Agriculture Total Return, one is linked to the Lehman Brothers Commodity Index Pure Beta Total Return and the final one is tied to the S&P Listed Private Equity Index Net Return. All the notes will pay par plus a factor of the index return less an investor fee.

"These products here are essentially trackers of indexes," Mortimer said.

But Mortimer expects the offerings to attract a large segment of the market.

"They are very low cost, a very easy way to gain exposure to the underlying assets," Mortimer said. "They've put together the commodities, which obviously have been quite popular, trying to capture that performance."

© 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.