Royal Bank of Canada has launched a a reverse-convertible note--typically linked to single stocks---which references an index. The one-year RBC note, set to price at the end of the month, is linked to the Goldman Sachs Natural Gas Excess Return Index. It offers an 18% coupon paid quarterly, but investors' capital is at risk if at any time the index drops more than 25% in value. The RBC note is also different in that it pays investors in cash: most reverse convertible notes linked to single stocks pay out in equity.
It is the first reverse convertible that RBC has structured. Laurence Kaplan, director in structured products at RBC in New York, explained it has held back because the market for these investments is dominated by a handful of dealers. But it decided to enter the fray after coming up with something new to offer investors.
A rival structurer said the RBC deal's innovation should mean it will attract attention. He explained reverse convertibles work by selling put options on the reference entity to generate premium and so pay the investor's coupon. Reverse convertibles are not usually written on indices because indices are not volatile enough to pay high coupons.
