Barclays' new reverse convertible pales in light of older one, analyst says; financials see bull, bear products

By Kenneth Lim

Boston, Sept. 12 - Barclays Bank plc's planned reverse convertible linked to the Financial Select Sector SPDR fund offers poorer value and higher risk than a recent similar product from the bank, structured product analyst Suzi Hampson of Future Value Consultants said.

Meanwhile, Deutsche Bank AG's coming bearish autocallables linked to a fund of regional banks could be a timely product given the current sentiment in the sector, Hampson said.

Barclays on Thursday announced a planned series of reverse convertibles with largely the same structure as one that priced about two weeks ago.

Barclays plans to price the newer 11% reverse convertibles due March 30, 2009 linked to the Financial Select Sector SPDR fund.

Payout at maturity will be par in cash unless the fund's shares fall below the 75% of the initial price during the life of the notes and finishes below the initial price, in which case the payout will be the number of Financial Select shares equal to par divided by the initial price.

On Aug. 28, Barclays also priced $1 million of 11% reverse convertible notes due Feb. 27, 2009 linked to the same fund. The protection level was also set at 75% of the initial price.

"It's actually the same terms, same maturity, same barrier, same underlying," Hampson said. "But the pricing has changed."

In a report, Future Value gave the newer note a value score of 1.52 out of a maximum of 10, compared to 2.62 for the earlier product. The value score is the firm's estimate of how much value is left after fees and profit margin on the underlying derivative are taken out. Looking at the risk-adjusted return, Future Value also gave the newer product a return rating of 2.08 out of a possible 10, less than the 2.26 awarded to the earlier product.

The newer note also scored worse in terms of risk, according to Future Value. The newer notes had a risk rating of 4 out of 10, with 10 being the most risky, while the earlier notes received a risk rating of 3.64.

"The newer one has done worse on both value and risk," Hampson said.

Hampson explained that a large part of the change has to do with the underlying volatility, which increased to 45.15% from 44.94%. Because the risk of the product is higher now, but neither has the coupon risen nor the barrier declined, the product's attractiveness has been dulled slightly.

"It's quite a jump, really, in terms of comparing products," she added. "The value rating has gone down, so basically it's not as attractive. Everything's gone down. It's not a big matter, but I would suggest the product isn't as appealing as it was a month ago."

Change may be costly

Hampson noted that it is rare for issuers to change the terms of reverse convertibles between the initial indicative prospectus and the final term sheet, so the terms on the newer notes are unlikely to change at pricing.

She suggested that the terms may have been left the same between the older notes and the newer ones because it would have cost too much to raise the coupon to the next typical notch.

"They don't normally do coupons of 11.1%, it's usually in increments of half a percent, so maybe it would have cost them too much to go up to 11.5%," she said. "It would be interesting to see if they can get as many sales as they did with the earlier one."

Deutsche product timely

Deutsche Bank plans to price zero-coupon bearish autocallable optimization securities with contingent protection due March 31, 2010 linked to the SPDR KBW Regional Banking exchange-traded fund.

The securities will be called if the fund's shares close at or below the initial share price on Dec. 26, 2008, March 26, 2009, June 25, 2009, Sept. 25, 2009, Dec. 28, 2009 or March 26, 2010, which is the last valuation date in the life of the notes.

Investors will receive par of $10 plus an annualized return of 19.6% to 23.6% to the call date. The exact rate will be set at pricing. If the securities are not called, the payout at maturity will be par unless the fund closes above the trigger price - 145% of the initial share price - during the life of the securities, in which the payout will be par minus the fund return.

"It would appeal to someone who thought this basket of banks was going to go down, which after last week you might have people thinking that perhaps," Hampson said.

The Deutsche notes will reward holders if they are called on the first observation date, Hampson said.

"You just need this fund to be at or below its current level at the dates, and if it kicks out after three months, you get 5.4%, which is quite a good return for three months," she said.

Market sees both views of financials

Hampson noted that the current structured offerings in the market are catering to investors regardless of whether they are bullish or bearish on the financial sector.

"It's quite interesting," Hampson said. "If you think banks have been brought to their lowest point, it might be better to invest in something with a brighter outlook...But there's an option out there."

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