Barclays keeps terms on financials reverse convertibles; uncertainty a hurdle with Lehman, advisor says

By Kenneth Lim

Boston, Sept. 11 - Issuers may not have adjusted the terms on planned products linked to the Financial Select Sector SPDR fund because recent volatility gains may just be a spike, an investment advisor said.

Barclays Banks plc on Thursday announced a planned series of reverse convertibles, including one linked to the Financial Select SPDR with largely the same structure as an offering that priced a fortnight ago.

Barclays plans to price 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.

Same terms, different volatility

But the volatility of the Financial Select fund has gone up this week, and offering notes with the same terms as those from two weeks ago may not reflect the underlying risk, and investment advisor said.

"That's really interesting," the advisor said. "Usually if the underlying becomes more volatile, you'd expect the product to become slightly more attractive for the buyer, because as a buyer I'm taking on more risk...I suppose you might expect maybe a slightly higher coupon or a lower barrier."

Better protection would be attractive for investors in the financial sector right now, the advisor said.

"There's a lot of uncertainty in the space at this moment, and if I want to put some money into this space, I'd definitely put more value in downside protection," the advisor said.

Volatility may not last

But the advisor said the recent volatility in the sector may just be a spike.

"If you're looking at six-month volatility, you might think that this week isn't indicative of a longer period of assessment," the advisor said. "Also, the one that already priced only priced two weeks ago, so I imagine volatility hasn't changed that significantly even with the recent increase."

Barclays could also end up offering a slight discount on the notes, the advisor said.

Fears could hit Lehman

Meanwhile, current concern about the financial stability of Lehman Brothers Holdings Inc. was keeping the advisor away from the bank's products for now.

"I feel bad for them, but there's just too much uncertainty right now about what's going on with them," the advisor said.

Those comments came on the back of some recent deals by Lehman, which has been relatively quiet over the past month. Lehman on Wednesday said it priced about $736,000 of three reverse convertibles that were linked to General Electric Co., Microsoft Corp. and Visa Inc.

Although the advisor thought that Lehman's credit would eventually hold or be taken over, there was still uncertainty about how the current turmoil would play out.

"Do I think they'll end up defaulting? No," the advisor said. "If Wall Street and the government was willing to bail out Bear Stearns, I doubt Lehman will be abandoned. I think they'll probably find a buyer or something. But the problem now is that nobody knows for sure what's going to happen, and until then it's not worth the risk trying to figure out what their credit is worth and whether you want to buy a product from them."

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