Sal Oppenheim Jr. & Cie has over the last several weeks been pitching exotic reverse convertible structures to its client base of brokers as their customers look to get to grips with volatile equity markets showing no clear direction. Aside from classic reverse convertible, the German firm has also been structuring reverse converts with up-and-in calls and down-and-out puts, according to Christina Mägerlein, senior v.p. in the retail products group in Frankfurt.
In a typical classic reverse convert Sal Oppenheim has purchased from investors a EUR25 million (USD21.8 million) equity put on SAP shares to structure a reverse convertible linked to shares on the German technology company, Mägerlein explained. The note pays a coupon of 22% throughout its life. However, if the underlying share price falls below the strike price of EUR172.41 over the one-year maturity, Sal Oppenheim is able to deliver 29 SAP shares instead of the EUR5,000 principal amount. Shares in SAP were trading at EUR172.40 last Thursday.
The firm has also structured variations on the theme to attract investors with either a bullish or bearish market view, Mägerlein continued. For example, an investor with a bullish view on SAP might purchase what Mägerlein described as a break reverse convertible. In this structure Sal Oppenheim is able to put 29 SAP shares back to the investor at a strike price of EUR166.67 if the underlying never trades below EUR166.67 or above a break price of EUR205. If it trades above EUR205 the investor gets back the full EUR5,000 principal amount. This structure carries a 14% coupon.
The structures have been popular lately because last year many investors in reverse converts got shares delivered instead of being repaid principal, Mägerlein said.
