Low coupon on Tibco Software-linked reverse convertibles indicates low risk, analyst says

By Sheri Kasprzak

New York, May 4 - Reverse convertibles linked to the shares of Tibco Software Inc. carry a lower-than-typical coupon, according to Suzi Hampson, analyst with London-based Future Value Consultants.

The one-year notes pay 6.75% to 8.75% annualized interest, assuming the final-level barrier of 75% is not breached.

"This is not a risky stock," said Hampson in an interview on Friday.

"This is going to be for more of a conservative investor. The barrier is on the high side. Seventy-five percent does feel very likely over a year. Stock is less volatile."

The low coupon, Hampson said, suggests that the note will not pay enough.

The ideal investor for a security like this - one linked to a single stock rather than a basket - is someone who intends to monitor that particular company instead of several companies, a broad index or sectors.

The investor might also want to invest in the company, but doesn't really believe the company will grow enough in the next year to just buy shares outright.

No participation in appreciation

Two cons of the notes, according to an FVC report released Friday, are that the 75% barrier leaves the principal at risk and the return is limited to the income payments and fixed principal repayment. There is no participation in any appreciation of the value of the stock, the report noted.

On the upside, the income stream from the notes is not dependent upon the performance of the asset.

Additionally, having only one underlying asset limits the amount of monitoring the investor will have to do. The product is really for an investor who wants to keep monitoring this particular stock over the course of the year, said Hampson.

Deutsche Bank AG is the issuer for the offering.

RevCons linked to oil stocks

Coupons were decidedly better on several notes linked to the shares of oil and natural resources companies, Hampson noted.

Barclays Bank plc intends to bring reverse convertibles linked to the stock of Northern Oil & Gas Inc. and Peabody Energy Corp., and the Bank of Montreal is set to price reverse exchangeable notes linked to the shares of Cliffs Natural Resources Inc.

"Changes in oil will affect the stock, but it's not the same as investing in the commodity itself," Hampson said.

"If you create a product that is easier and cheaper, you can get the investor better terms."

The higher coupons suggest to Hampson that these companies are more volatile.

The Northern Oil-linked notes have a three-month term and pay an 11.5% annual coupon. Those bonds also feature a 75% barrier.

The Peabody-linked notes have a six-month term and pay an annualized 10% coupon with a 65% barrier.

The Cliffs notes have a three-month term and pay an annualized coupon of 11.14% with a 75% barrier.

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