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Return of the Rev Con - 27/07/2022

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 it has been possible for us to work with providers to help bring to the market the best we have had available in almost a decade: The Citigroup backed Walker Crips UK Fixed Income Plan (CT047).

This plan will pay a fixed income of 1.4% each quarter (5.6% annual) for six 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 six-year term closes no more than 35% below the initial level recorded on 12th August 2022.

At the time of writing the base rate sits at 1.25%, making an annual income of 5.6% 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 six-year term, we feel that the secured income offsets the potential capital loss to an adequate degree. When back-tested, this plan returned capital in full in 100% of all scenarios.

Full details of Walker Crips UK Fixed Income Plan (CT047) can be found here.

Structured investments put capital at risk.

Past performance is not a guide to the future.
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