Income seen propelling surge in reverse convertibles; Barclays prices $7 million notes linked to Peabody

By Sheri Kasprzak

New York, Oct. 3 - Reverse convertibles led structured product action yet again Tuesday and one market source said he feels the income-oriented appeal of the structure is driving the influx of offerings.

"We think the market is still in its infancy," said one market source when asked about the growing popularity of reverse convertibles.

"Investors are demanding higher income-producing investments. The baby boom generation is beginning to shift from equity-driven assets into more income-oriented investments. People are living longer and the majority of investors have not saved enough money to live a comfortable retirement that will last their lifetime.

"The current 5% interest-rate world does not help.

"Reverse convertibles now offer investors high-coupon income in exchange for the downside risk associated with these products.

"Investors are also purchasing portfolios of these securities and using the dollar cost averaging techniques they employ in the equity world. This helps them reduce market risk and focus more on building well-diversified portfolio in multiple securities over time. In summary, we think the industry is simply meeting the increased demand for income."

Another market source said that makes some sense, especially when the coupons on these notes are substantial.

"I'd say that's pretty accurate for the majority of these [reverse convertibles]," he noted.

"It really depends on the coupon. Don't get me wrong, even a 10% coupon is better than what you could hope for [in other investments] given current the interest rate environment we're in."

Barclays hits 20%

In fact, Barclays Bank plc priced a $7 million reverse convertible note linked to Peabody Energy Corp. with a 20% coupon Tuesday.

Those notes are due Jan. 4, 2007 and have an 80% threshold on the trigger.

The Peabody-linked note is just one of several energy-related reverse convertible offerings announced recently. Barclays also priced $1 million in 15.25% reverse convertibles linked to Southwestern Energy Co. late last week and Rabobank Financial Products BV said it plans to price reverse convertibles linked to Chesapeake Energy Corp. and Schlumberger Ltd. The Chesapeake notes will carry an 11.25% coupon and the Schlumberger notes a 10.5% coupon.

Sources earlier this week noted that dropping oil prices may be fueling reverse convertible offerings connected to energy companies.

Credit Suisse's Nutri/System notes

Another planned reverse convertible also carries a substantial coupon. Credit Suisse (USA), Inc. intends to price 19.5% reverse convertible notes linked to Nutri/System, Inc.

The notes carry a knock-in level of 60% of the initial price and are due April 30, 2007.

The notes will be distributed by FIS Securities.

FIS will distribute another note for Credit Suisse with a large coupon. These notes are linked to the Nasdaq Stock Market, Inc. and carry an 18.25% coupon.

Those notes are due April 30, 2007 and have a knock-in level of 80% of the initial share price.

Wachovia principal-protected notes

Elsewhere, Wachovia Corp. announced its plans to issue 0% principal-protected notes on Monday that continues the recent popularity of emerging markets deals - but varies from most offerings in the last few months which have linked to indexes or currencies.

Those notes, due Sept. 30, 2011, are linked to a basket of Chinese and Indian companies.

The basket includes the American depositary shares of PetroChina Co. Ltd., China Mobile Ltd., China Petroleum & Chemical Corp., China Telecom Corp. Ltd., Infosys Technologies Ltd., Wipro Ltd., Dr. Reddy's Laboratories Ltd. and Tata Motors Ltd.

Payout at maturity is par plus the sum of the quarterly returns on the basket with a floor of 105% of par. Each quarterly return will be capped at 7% to 7.5%, with the exact cap to be determined at pricing.

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