Autocall Reverse Convertible [SocGen]

The covered warrants and structured products experts at SocGen have been making quite a name for themselves in recent months by issuing rather strange coupon based notes. No, these aren’t coupons to help you save money on the weekly shopping, but income payouts based on certain shares or markets behaving in a pre-determined way. One product we’ve looked at in the past paid out a handsome dividend of around 15% in one year provided a basket of three drug company shares didn’t fall by more 20%. Nice idea except that one of the shares in the basket promptly went and fell by more than 20% in value, striking out that juicy income coupon.

SocGen are at it again this week with a more tempting vehicle – it’s called very inelegantly the Autocall Reverse convertible (SG41). We have to be honest and say we’re not quite too sure what all those words mean (the reverse convertible bit we think means you get paid an income as long as the underlying shares being tracked fall in value) but the product is actually quite interesting.

Here’s the skinny.

It targets the FTSE 100 index and will pay out over the next year 14p in the £, quarterly, as long as the FTSE doesn’t fall by more than 30% in value (from around 6200 to 4350). If the FTSE 100 rises in value beyond the initial level in the 1st quarter of that 1st year the note redeems and pays out one quarter of that 14p coupon i.e 3.5p. If the FTSE 100 doesn’t rise in the first quarter but does in the next quarter, you get 2 times 3.5p i.e 7p and so on and on. The important point here is that if the FTSE 100 spends the next year below 6200 and doesn’t rise above that level at any of the key quarterly observation dates in the year, you get the full 14p.

Obviously if there’s a really big correction and the FTSE 100 crashes below 4000 this note is in trouble – you lose 1% in the capital value of the note for every 1% fall in the index. But most of us don’t think the FTSE will fall by that much (if it did it would be trading at close to 8 times PE and the yield would probably be above 4%) but we do think the market is in for a tough ride over the next six months. Basically we’re moderate bears and if we’re right this note could be a great way of getting a good income from falling markets yet you’re also protected if the markets rise in value.