Exploring Barrier Reverse Convertibles: Strategies for Financial Stability

What laypeople consider to be the devil’s work, financial engineers affectionately call “Strukis”. Structured products are a ready-made package that can be purchased with just one investment. This is despite the fact that it contains several building blocks such as bonds and derivatives.

In the vast jungle of these vehicles, today we are taking a closer look at the species that is particularly popular in Switzerland: the Barrier Reverse Convertibles, or BRC for short.

The BRCs are interesting in an environment that would otherwise cause despair for investors. For example, when fears of recession, the specter of inflation and the war in Ukraine paralyze market participants. As well as the stock markets moving sideways.

Now let’s say I had my eye on UBS shares. But I assume that it won’t make any big leaps within a year. In this case, it is more attractive for me to look for a BRC on UBS than to invest directly in the paper.

Specifically, for example, I find a BRC on UBS that runs until August 22, 2024 (ISIN: CH1248342227). The good news is that this guarantees me an interest rate of 6.25 percent.

This is independent of the ups and downs on the financial markets. That is significantly more than a solid bond offers.

But what if the underlying asset, i.e. the UBS share, drops? Now the exciting element comes into play. My product has a barrier at a share price of 11.985.

As long as the UBS security does not fall below this threshold, I will receive 100 percent of the face value of my BRC back. So I currently enjoy a security buffer of almost 50 percent. And it seems unlikely that the stock will fall any further.

But the worst-case scenario is not impossible. If the share is trading below the barrier at expiry, I have to pay back the nominal value.

There is no capital protection. But I receive my interest payment (coupon) – plus the UBS shares. So I still drive better than if I had acquired the title straight away.

Only if UBS shares shoot through the roof would I be better off with a direct investment. Then I would fully benefit from the price increase – instead of having to console myself with the capital repayment and the coupon payment.

So far we have analyzed a simple BRC. Now the banks are creative, which is why there are countless game variants on the market. Multi BRC, which has several stocks in mind, is very popular.

In many cases they are denominated in the name of the Swiss stock market giants Nestlé, Roche and Novartis. Such multi-combos generate more interest, but in return the risk is higher: the repayment of the nominal value is usually linked to the title that performs the worst.

Anyone who wants to invest in BRC can find new products to subscribe to at banks. You can also purchase these later on the stock exchange. Which is more advantageous depends on the state of the market.

What is the real catch with such financial constructs? On the one hand, I do not receive a dividend because I do not own the share during the term of a product. On the other hand, from a legal point of view, the instruments are bonds. They are only as reliable as the issuing bank is solid. A financial risk that should not be ignored after the banking crisis.

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Stephan Lehmann-Maldonado brings together two of his passions: the fascination for economic events and that for clear communication. He wrote for business media while he was studying finance at the University of Zurich. He later deepened his knowledge in banking practice and teaching learners. Today he runs a small communications agency.