RBC, JPMorgan offer financials-linked reverse convertibles; volatility spike aids terms, distributor says

By Kenneth Lim

Boston, Sept. 30 - Issuers are offering a number of reverse convertibles linked to the common stocks of financial companies as high underlying volatility allow them to offer attractive terms, a structured products distributor said.

Royal Bank of Canada plans to price 21.2% reverse convertibles due Jan. 9, 2009 linked to the common stock of JPMorgan Chase & Co. At maturity, investors will receive par if JPMorgan common stock finishes below its initial level and never falls below the barrier price of 65% of the initial share price. If the stock finishes below its initial level and never falls below the barrier price, investors will receive the number of shares equal to par divided by the initial stock price.

RBC also plans to price 29.8% reverse convertibles due Jan. 9, 2009 linked to the common stock of Well Fargo & Co. The Wells Fargo-linked notes will have a barrier price of 65% of the initial share price.

JPMorgan links to Bank of America

JPMorgan is offering 20% reverse convertibles due Jan. 9, 2009 linked to the common stock of Bank of America Corp. At maturity, investors will receive par is Bank of America stock finishes below its initial level and never falls below the barrier price of 65% of the initial share price. If the stock finishes below its initial level and never closes below the barrier price, investors will receive the number of shares equal to par divided by the initial stock price.

Volatility aids coupon levels

The recent spike in volatility among financial stocks allow issuers to offer reverse convertibles linked to the sector with more attractive terms, the distributor said.

"Because of what's happened in the sector, issuers can afford to price reverse convertibles linked to financial companies with better terms," the distributor said. "That means the coupons can be higher and the barriers can be lower."

The underlying risk is naturally higher for those products, but for investors whose views fit the notes, the products can be an interesting deal, the distributor said.

"Getting 20-something percent [annualized] in three months is clearly better than risk-free investments, and definitely better than the yields you would be getting if you were to buy the shares of the underlying companies," the distributor said. "So if you've done your research and you think these stocks could go up or they won't fall below the barrier, these could be interesting for you. The main risk is that the principal is not protected."

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