Reverse convertibles securities

Reverse convertibles securities

What are Reverse Convertible Securities?

* Short-term coupon bearing notes, structured to provide enhanced yield while participating in certain equity-like risks.
* Investment value is derived from underlying equity exposure, which is paid in the form of fixed coupons.
* Investors receive full principal back at maturity if the Knock-in Level is not breached (which is typically 70-80% of the initial reference price).
* The underlying stock, index or basket of equities is defined as Reference Shares. However, in most cases, Reverse convertibles are linked to a single stock.

Reference Shares

* Underlying stocks or basket of equities can include names such as:
o Dell Computers
o Wal Mart
o Exxon Mobil
o Cisco
o Best Buy
o Corning
* Broad market indices may include names such as:
o Nasdaq-100 Index

How do Reverse Convertibles work?

* Short-term investments, typically with one year maturity.
* At maturity, investors receive either 100% of their original investment or a predetermined number of shares of the underlying stock, in addition to the stated coupon payment.
* The investors’ earning potential is limited to the security’s stated coupon, because investors receive coupon payments regardless of the performance of the underlying reference shares.
* Coupon payments are the obligation of the Issuer and are paid quarterly.
* Sold by prospectus or offering circular and pricing term sheet.
* General rule of thumb:

The higher your coupon payment, the greater likelihood of receiving stock at maturity.

* NOTE: Whether or not the Knock-in Level is breached, the investor will receive fixed periodic coupons through the term of the notes.

Delivery at Maturity

At maturity, there are 2 possible outcomes:

* Cash Delivery
o Stock closes at or above the Initial Share Price upon valuation date, regardless of whether the stock closed below the Knock-in Level during the holding period. OR stock closes below the Initial Share Price, but has never closed below the Knock-in Level.
* Physical Delivery
o Underlying shares closed below the Knock-in Level at any time during the holding period and does not trade back up above the Initial Share Price on valuation date (4 days prior to maturity).

Physical Delivery

* Initial Share Price is determined on Trade Date.
* The final valuation of the shares is based on the closing price of the Reference Shares determined 4 days prior to maturity.
* If the investor is delivered physical shares, their value will be less than the Initial Share Price, however, investors are not required to sell their shares at prevailing market prices.

Secenario 1 - Cash Delivery

Cash Delivery


Reference share closing price is above the Initial Share Price of the note on Valuation Date (4 days prior to maturity), regardless of whether the stock closed below the Knock-in Level. Investor receives Cash Delivery Amount (Par), at maturity.

Secenario 2 - Cash Delivery

Cash Delivery


Reference share closing price is below the Initial Share Price of the note on Valuation Date (4 days prior to maturity), but never closed below the Knock-in Level. Investor receives Cash Delivery Amount (Par) at maturity.