Shareholders are not the only ones frustrated by the ongoing price slump at Roche: many holders of partial protection products such as barrier reverse convertibles (BRC) are also faced with realising losses due to breached barriers, because some of them are trading at well below par. Taking as an example a single BRC on Roche with a barrier event and a strike at CHF 280, the underlying will have to appreciate by around 25% if the full nominal is to be paid out at the end of the term. This is a highly ambitious target, which may become even more difficult to achieve depending on the remaining term. Now, however, investors do not necessarily have to wait until the expected loss, because they can actively take steps to prevent it. Leonteq has what are known as recovery solutions for this purpose. These offer the possibility of turning a minus into a plus without exorbitant price premiums.
The tactic is as follows: the BRC is sold at the current bid price and the capital generated from the sale is used to purchase a recovery product, the ask price of which is in the region of the selling price of the old product. This allows the term to be extended, and the recovery of the underlying generally does not need to be as great in order to dispose of the investment without a loss or even at a profit. The recovery products are barrier discount certificates with a European barrier where the current price of the underlying is close to the barrier. In the case of Roche's participation certificates, therefore, a stagnation or increase in the price of the underlying above the barrier up to the expiry date will be sufficient to recover the full nominal at the end and thus offset the losses incurred from the BRC. Since this is a European barrier, the structure allows the underlying to move freely during the term. Only on final fixing does the barrier become active.
Leonteq has a total of over 20 barrier discount certificates, nine of which are on Roche. In February this year, for instance, a product (security number 132542169) with a term of 15 months was issued. The barrier was fixed at 101.95% of the then share price, or CHF 234.9948, the exercise price at CHF 325.0050. Should no barrier event occur, i.e. if Roche is trading at more than CHF 234.9948 on final fixing, holders will receive the full nominal. Only around 76% has to be paid at the moment, though, giving a hefty return of a little more than 30% (as at 15.04.2024). In the event that the certificates end up trading at or below the barrier, Roche shares corresponding to the exercise ratio will be delivered.
The recovery solution just presented thus needs the Roche share price to rise slightly for the investment to close with a double-digit percentage return. However, the Leonteq product range also includes rather more cautious structures where an attractive return can be achieved if the price merely treads water. One such example is the barrier discount certificate with the security number 132542170 launched at the same time. The barrier level for this product is CHF 210.0086, and hence below the current price. The exercise price is CHF 299.9958. Assuming Roche is trading above the barrier on the maturity date of 5 May 2025, the investment will close with an interest rate of a good 16% (as at 15.04.2024).
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