Reverse Convertible Securities.

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We are looking at moving 10% of our portfolio inot 6 month Reverse Convertable Securities that have a coupon of from 10% to 15%. Does anyone here have any experience with reverse convertible securities?

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Type: Discussion • Score: 4 • Views: 16,342 • Replies: 47

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How do they operate?

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Bump.

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i am converting about 20% of our portfolio to reverse convertable securities as I believe the market will ramian essentially flat over the next year with some mild highlights the last quarter of this year and the first quarter of next, but the fixed rate of return on the convertable securities ranging between 10% and 15% makes them attractive to me at this point in time.

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I'm investing in Stocks, nothing fancy, just the plain, good old
BLUE CHIPS.

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That's a new one on me, dys. I found an interesting article about these kinds of investments.

http://www.lasallebonds.com/structured_products/understanding_reverse_convertible_securities.html

Quote:

Investment Risks and Considerations
Suitability
Reverse convertibles may not be suitable for all investors due to the potential for loss of principal.

Reverse convertibles consist of a debt instrument and a put option. By purchasing a reverse convertible, the investor sells the issuer the right to deliver the underlying asset to the investor at some point in the future. At maturity, the investor could receive either cash or shares of stock. Reverse convertible investors should have the knowledge and experience in financial matters necessary to be capable of evaluating the risks of such a transaction, and be financially able to bear the risk of a loss of principal.

That paragraph bothers me.

What we do is buy stocks with a good track record, and steady growth of dividends.

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dyslexia wrote:

i am converting about 20% of our portfolio to reverse convertable securities as I believe the market will ramian essentially flat over the next year with some mild highlights the last quarter of this year and the first quarter of next, but the fixed rate of return on the convertable securities ranging between 10% and 15% makes them attractive to me at this point in time.

I really don't think you know what you're talking about, but you can carry on anyway.

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Re: Reverse Convertible Securities.

dyslexia wrote:

We are looking at moving 10% of our portfolio inot 6 month Reverse Convertable Securities that have a coupon of from 10% to 15%. Does anyone here have any experience with reverse convertible securities?

I don't have personal experience with them. But I considered them for my own portfolio and decided I don't like how those contracts work.

Don't let the high coupon fool you. Reverse convertible securities work either like stocks, or like bonds, or like cash, at the issuer's discretion. The issuer, of course, will make whatever choice is best for him, or conversely, worst for you. The high coupon, then, represents a premium for a risk to your investment; and a considerable one at that. You may be betting that the market will stay flat for a while. I won't argue with you about that, but whoever is trying to sell this asset to you wants to bet the opposite. He either bets, contrary to almost everybody else, that the market will go through the roof, in which case he'll convert to cash. Or he bets that the market will go south, in which case he'll convert it to equity and leave you with the bill. Are you sure this is the kind of investment you're looking for? Or did some sleazy used car salesman type investment banker recommend it to you as a get-rich-quick scheme?

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As of yesterday I am up 1.89% on the stocks plus 8.5 to 13% return via coupons, not at all a bad return on investment. Time will tell as I still have 8 months to go.

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Its just diversification
Im not saying these are the best things to put in your portfolio, but there are a lot of people who could use this type of derivative exposure. If you are a person who wants equity exposure or has been thinking about buying a stock, this is perfect. THE MAIN QUESTION IS: would you be happy owning shares of the underlying company? However, one great feature is that even if you turn your investment into shares, you still receive that coupon payment for the year. The short maturities are also good for people not wanting to tie up cash for a long period of time (like a municipal bond or treasury)

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distributor of reverse convertibles
I am actually a creator and distributor of reverse convertible seconds. I think you guys may be a little confused about how they work. It isn't up to the issuer whether they "want" to delivery you stock or cash...it is actually all spelled out at the start.

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Reverse Convertibles
Recently I purchased a 15% 6 month Peabody Coal BTU reverse convertible with a 20% downside protection and a monthly payment of interest. Thus, every month I get a prorated 15% payment and if the stock does not drop below the marked price which in this case was Jan 26th, then after 6 months I will get my $60k back. If it does drop below the marked price I may have to take stock instead. BTU is a great company and thus taking stock doesn't worry me. Also, it has experienced a large decline going into the mark date. Hope this helps explain what they are.

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Reverse Convertibles
I would be interested in knowing when you think there are good ones available. I am happy buying them in some companies when the market is tanking.

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I'm sure they're attractive because of the large coupon discount.

What happens when they reverse and convert though?

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Re: Reverse Convertible Securities.
Are you still considering Reverse Convertibles?? Our firm issued two this month. Both had a one year maturity and were rated AA and AAA respectively. One had a 15.25% coupon and the second had a 14.25 % coupon. They both had 40% downside protection. We issue one or two a month. They have been successful so far. Only one issue out of about twenty that we were involved in turned into stock.

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the notes I bought at the beginning of this topic have now matured, I realized a healthy rate of return and purchased 4 more with higher coupons. (6 month maturity)

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Good for you, Dys!

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Reverse convertible securites
With these you are basically buying a bond and selling a put option on the underlying stock. Selling put options has the same downside risk of owning the stock without the upside potential. Your upside is a premium received. You are not getting 'extra' interest. You are receiving interest and some premium for selling the put. Unless you believe you are in a bull market do not buy these. You can also look at yahoo to find the value of the put option you are selling and see if the deal makes sense. Maybe you just want to sell puts and forget the bond. Ask your broker if the implied volatility of the put option you are selling is higher than the historical volatility of the underlying stock over the time period of the reverse convertible bond. If it is not then the deal is not good.

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I suggest you work for a living. But, that's just me.

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cjhsa wrote:

I suggest you work for a living. But, that's just me.

You're right, as always. How rude of Dys to retire without asking for your permission first!

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Reverse Convertible Securities.

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