Josh Mayne., Lowes Financial Management
Reverse Convertible Notes, or fixed income plans, are a specific type of structured investment that will generate a regular unconditional income for investors for a fixed term. Fixed income plans place capital-at-risk, albeit with a degree of downside protection through the incorporation of a capital protection barrier. To compensate investors for the risk of capital loss, fixed income plans pay an interest rate that is greater than conventional debt of the same issuer, maturity and seniority, making them a potentially attractive investment for those seeking regular fixed income.
We haven’t seen any favourable fixed income plans issued within the sector for significant period of time – in fact, the last fixed income plan to be marked as Lowes ‘Preferred’ was issued nine years ago in 2013. Investec FTSE 100 Enhanced Income Plan 1 - Option 1 (Investec) matured in March 2019, having paid a regular monthly income throughout term totalling 38.88% (6.48% annually).
However, recently we have seen terms improve to the extent that we do not believe it will be long before we see attractive fixed income plans being offered to the wider market. One example, which showcases how the sector offerings have improved is Walker Crips UK Fixed Income Plan (CT046).
This plan will pay a fixed income of 1.35% each quarter (5.4% annual) for five years. The return of capital is linked to the performance of the FTSE 100 Index to the extent that investors’ original capital will be returned in full provided that the index at the end of the five-year term closes no more than 35% below the initial level recorded on 19th August 2022.
At the time of writing interest rates sit at 1.25%, making an annual income of 5.4% more than attractive, not least given that this income is conditional only on the continued solvency of the counterparty bank, which in this instance is A+ rated Citigroup.
Whilst typically we would advocate against a 65% capital protection barrier on a five, or six-year term, we feel that the secured income goes a long way towards offsetting the potential capital loss. When back-tested, this five-year plan returned capital in full in 99.42% of scenarios to have matured - the 0.58% of scenarios that lost capital began in the late 90’s and suffered as a result of the dot com crash. It is worthy of note that when the investment term was extended to six years, 100% of the back tested scenarios that matured returned investors’ original capital in full.
The terms of the Walker Crips UK Fixed Income Plan (CT046) are a significant improvement on what’s been available for some time, though they aren’t quite attractive enough to make it onto our ‘Preferred’ list but showcase the improvement in terms now available. For details of this and all other available structured products available in the UK retail space, click here.
Structured investments put capital-at-risk.
Past performance is not a guide to future performance.
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