Reverse convertibles tied to Bear Stearns won't recover, observer says; Svensk sells more euro bear notes

By Kenneth Lim

Boston, March 24 - The handful of structured products linked to the common stock of Bear Stearns Cos. Inc. are mostly out of the money, but the impact on the markets is likely to be limited, a distributor said.

Bear Stearns stock (NYSE: BSC) fell drastically a week ago following news that the troubled New York bank was seeking a bailout from JPMorgan Chase & Co. that initially valued its stock at $2 apiece. The stock was trading around $80 per share at the start of March.

"It really hurt for investors who were holding onto reverse products linked to the stock," the distributor said. "I think for reverse convertibles, especially, it just erased whatever protection you had at one shot. And because the stock fell by so much, it's really going to wipe out a lot of principal."

The soft principal protection on reverse convertibles usually offer a cushion in two ways - the principal will be reduced only if underlying closes below the barrier level during the life of the notes and the underlying finishes below the initial level at maturity.

HSBC USA Inc.'s 14.5% reverse convertible due May 30, 2008, for example, has a barrier level at 60% of the initial share price of $86.48. And JPMorgan's 14% reverse exchangeable due April 30, 2008 has barrier level at 75% of the initial share price of $91.10.

"If the stock falls below the barrier, sometimes the investor can still hope that the stock goes back up and doesn't end below the initial price, so that the principal is still protected," the distributor said.

"In this case the stock's fallen so far I don't think anybody's really still counting on the stock going back up. If you think that's going to happen, you would just buy the stock direct and make back your money when it goes up. That's if you're confident the stock's going back up, and like I said, I don't think anybody's counting on that."

But the distributor said the damage for investors is likely to be limited.

"I haven't heard an unusually big outcry about this," the distributor said. "I mean, sure, folks are concerned because of what's happening at Bear Stearns, but there's nothing out of the ordinary. I think there's a few reasons for this. First, there aren't that many products linked to Bear Stearns still in the market right now. And those that came out this year haven't been very popular. And most investors probably held those products as part of a larger portfolio, which probably softened some of the impact. So I don't think you're going to see a very big kind of fall-out from this."

Structured products desks are likely to keep products linked to Bear Stearns in hibernation for a while, the distributor said.

"I think there's just too much risk inherent in the name right now," the distributor said. "It's going to be tough to price it, and if investors are having a hard time figuring out a strategy on the underlying, they're not going to be looking for that structured product.

Svensk sells euro bear notes

AB Svensk Exportkredit priced a further $17.24 million of 0% leveraged bear notes due April 28, 2009 linked to the euro/U.S. dollar exchange rate via Goldman Sachs & Co., suggesting that some investors are still taking bearish bets on the euro.

Svensk has now sold $119.47 million of the notes, which priced at 100.067 in the latest tranche. The previous tranche on March 7 comprised $73.25 million worth of notes at par, and Svensk sold $28.97 million of notes at 98.9 on March 14.

The notes will pay par plus 150% of the absolute value of the percentage decline in the exchange rate if the euro falls relative to the dollar. If the euro gains relative to the dollar, investors will lose 1% for every 1% increase in the exchange rate.

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