May 11, 2015 Comments (0) Blog, Securities Fraud

Downside of Reverse Convertible Notes

(Last Updated On: July 17, 2015)

Reverse convertible notes (RCNs) are complex products that have characteristics of both stocks and bonds. To the average investor, reverse convertible notes can appear similar to typical debt instruments (like a note or bond).  However, reverse convertible notes are tied to the performance of an underlying stock and are far more complex than notes or bonds. Often investors are attracted to the relatively high interest rate or coupon associated with RCNs over a short period of time. Typically, RCNs matures in 6 months to a year and have a coupon of 7% up to 25%.

However, many investors don’t realize that they bear all the downside risk while the issuer of the RNC receives all the potential upside appreciation of the underlying stock or asset. Investors receive interest payments throughout the life of the RCN and in theory either 100 percent of their original investment or a predetermined number of shares of an underlying stock.

The trouble is most RCN are structured as what is known as a knock-in. If the value of the underlying stock remains above the knock-in level, the investor will receive the full cash return of their principal in cash. However if the knock-in level is breached the issuer can pay back the principal with the underlying stock (which could have declined precipitously in value). As such, investors in reverse convertible notes stand to risk all or a large majority of their principle investment.

Furthermore, RCN often charge an up-front fee for packaging the deal. The fees can range from 1% to 8%. Often investors are not aware of these fees.

In addition to the high-risk and hidden fees, RCN are often hard to evaluate and can even be illiquid. Issuers are not required to maintain a secondary market, as a result selling RCNs can be very challenging.

The following is a list of RCNs that have been problematic for some of our clients:

Barclays Bank PLC Reverse Convertible Note Linked to Celegene Corp. 12.500%

Barclays Bank PLC Reverse Convertible Note Linked to EMC Corp. 12.5%

Barclays Bank PLC Reverse Convertible Note Linked to Corning Inc. 15%

Barclays Bank PLC Reverse Convertible Note Linked to Grant Prideco Inc. 14.25%

Barclays Bank PLC Reverse Convertible Note Linked to Noble Corp. 14.5%

Barclays Bank PLC Reverse Convertible Note Linked to Qualcom Inc. 9.25%

Barclays Bank PLC Reverse Convertible Note Linked to Valero Energy Corp. 10.25%

Barclays Bank PLC Reverse Convertible Note Linked to Apple Inc. 17.5%

Barclays Bank PLC Reverse Convertible Note Linked to Noble Corp. 13.15%

Barclays Bank PLC Reverse Convertible Note Linked to EMC Corp. Mass. 17.25%

ABN Amro Bank N V Reverse Exchangeable Securities B/E Linked to Citrix Systems 13.9%

ABN Amro Bank N V Reverse Exchangeable Securities B/E Linked to Accenture Limited 13.75%

ABN Amro Bank N V Reverse Exchangeable Securities Linked to Cisco Systems Inc. 11.95%

HSBC USA Inc. Reverse Convertible Note Linked to Corning Inc. 144A 16.3%

JPMorgan Chase & Company Structured Investments B/E Linked to Marathon Oil Corp. 17%

If you have questions about a structured product or reverse convertible note sold to you by your financial professional, the securities attorneys of The White Law Group may be able to help. For a free consultation, please contact The White Law Group at 312-238-9650.

The White Law Group, LLC is a national securities fraud, securities arbitration, investor protection, and securities regulation/compliance law firm with offices in Chicago, Illinois and Vero Beach, Florida.

For more information on The White Law Group, visit www.whitesecuritieslaw.com.

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