Reverse convertibles are true classics in the world of structured products, and enjoy enormous popularity here. There are good reasons for this: not only is the structure easy to understand, it also offers plenty of opportunity. RCs come with coupons that are usually well above the market level and are also guaranteed to be paid out. The risk of the product type lies in the repayment at the end of the term, which depends on the price of the underlying on the valuation date. If the underlying is trading at least at or above the strike price, the investment delivers the maximum return. If, on the other hand, it is trading below the strike, investors generally get the underlying.
Leonteq recently issued 15 reverse convertibles on domestic stocks listed on the BX Swiss. The selection extends from second-line stocks such as Idorsia through mid-caps like ams OSRAM to blue chips such as Roche or Zurich Insurance. Four of the 15 products come with double-digit percentage p.a. coupons. These are the underlyings ams OSRAM, Credit Suisse, Idorsia and Zur Rose. The front-runner in terms of interest rates is online pharmacist Zur Rose, which offers 14.96% p.a. Even the less volatile SMI heavyweights Nestlé and Roche, though, still bring coupons in excess of 5%. While there may be differences in the interest rates paid, the 15 new reverse convertibles have the same features: the strike for all products stands at 100%, and there is a term of 3 years.
As Zur Rose is currently trading slightly under par, the maximum chance of a profit is actually somewhat above the coupon level. That is because the share price of the online pharmacist is consolidating after a surge at the start of February, when some CHFmn 360 was raised from the sale of its Swiss arm. Investors were both delighted that it enabled the company to tackle its considerable debt mountain and excited by the prospects afforded by the associated concentration on the German market, with the neighbouring country about to see the rollout of the highly promising e-prescription. If Zur Rose is trading at least at the strike price of CH 48.92 when the term ends on 10 February 2026, the investment will deliver the maximum return of 44.15%. The above-average volatility of the Zur Rose share is also experienced by Idorsia and ams OSRAM, which means that the reverse convertibles improve the potential for profits when markets are treading water. The upward price potential of the pair is rather limited in any case: the first, a biotech firm, saw its 2022 losses worsen from CHFmn 635 to CHFmn 828 and expects to post a negative operating result of around CHFmn 750 this year. Meanwhile, the sensor manufacturer is anticipating a slowdown in business at the start of the year. “We are currently observing characteristics of a market correction and expect the prevailing macro-economic and sector situation to continue during the first half of 2023,” says the forecast from the group’s head office. The perfect environment, then, for RCs.