Centrobanca has sold to Banca IMI a six-month knock-in put on shares of Banca di Roma, in order to hedge a recent reverse convertible issue. Luca Colombo, trader at Centrobanca in Milan, said the strike on the put is EUR1.178 (USD1.118) with a knock-in at EUR0.9424. The six-month note boasts an 8% coupon, or 16% on an annualized basis. The notional size of the put is EUR3.3 million. Last Tuesday, the underlying stock closed at EUR1.22. SanPaolo IMI bought the reverse convertible in a private placement, according to Alessandro Canali, head of structured products at Banca IMI in Milan. Banca IMI is the investment banking affiliate of retail bank SanPaolo IMI. An official at SanPaolo IMI said it bought the reverse convertible on Banca di Roma because the note offered a high coupon and it thinks Banca di Roma's share price will not be below the strike level in the next six months.
An analyst at Schroder Salomon Smith Barney said the bank's 12-month target price for Banca di Roma is EUR1.36. With no news expected to be announced by the bank, the price should grow in line with the market. He added that he does not think the share price will fall below EUR0.94 before June because that is below the book value of Banca di Roma.
Buying a reverse convertible is the synthetic equivalent of buying a note and selling a put. Selling the put generates premium, which is used to beef up the coupon on the note. The knock-in level on the put allows the share price to drop slightly without the investor having to buy the shares at the strike level. If the option knocks in, then at maturity, the issuer can choose to give the investor cash or shares.
