Issuance of multi or barrier reverse convertibles in Switzerland has increased by 135% in the past five years, from 1,488 structures in 2010 to 3,501 structures in 2014. To date in 2015, 3,229 structured certificates, from 13 different providers, were linked to the product type which combines the reverse convertible and worst-of option payoffs.
“In times of a low or negative interest rate environment, when it is difficult to find yield at all, you have to look for an alternative,” said Erik Blattmann (pictured), head of public distribution financial products at Vontobel.
This can be done by buying bonds with a lower rating or by taking an equity-linked barrier reverse convertible that provides fixed coupon payments which are substantially higher than a typical money market instrument or a bond with a very good rating, said Blattmann. “Obviously, an equity-linked barrier reverse convertible is much more risky than one of these money market investments, but it provides a reduced risk compared with a direct investment in the underlying asset,” said Blattmann.
The popularity of the reverse convertible product range in Switzerland can be attributed to the fact that Swiss investors are typically very interested in coupon-paying products, according to Blattmann. “They want to invest in products with a regular coupon, and that is what you get with barrier reverse convertibles,” said Blattmann. “If you compare it to discount certificates, for example, which are extremely popular in Germany, the demand [for this product type] in Switzerland is very low.”
Apart from Switzerland, where it is the leading issuer of products in the reverse convertible range – Vontobel is responsible for more almost 70% of this year’s issuance – the bank is building up this product type substantially in Germany. “We established this product type in Germany because of the added value these products can provide,” said Blattmann. “We built up a range of 10,000 products in the reverse convertible area.”
Vontobel has been the market leader in Switzerland since 2008, according SRP data. In 2014, when it issued 5,687 structured certificates, the bank had a share of 22% of the Swiss market, followed by Leonteq (16%) and Credit Suisse (22%). This year, Vontobel has issued 4,853 certificates, including 4,655 reverse convertibles.
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