Reverse Exchangeable Securities (REX)
Reverse Exchangeable Securities (REX) combine certain features
of debt and equity by offering fixed coupon payments during the
term of the securities while basing the payment or delivery at
maturity on the price performance of an underlying stock.
The fixed coupon payments typically are higher than the yield
payable on a conventional debt security with a comparable issuer,
maturity and credit rating. A higher fixed coupon rate is possible
because the investor indirectly sells a put option to the issuer
on the underlying stock.
The put option gives the issuer the right to deliver the investor
stock at maturity rather than make a cash payment if the closing
price of the underlying stock on the determination date is less
than the closing price of the underlying stock on the date the
securities were priced. This is why we call these securities ‘exchangeable’.
Unlike ordinary debt securities, REXs do not guarantee the return
of principal at maturity. Instead, what investors receive at maturity
is dependent upon the price performance of the underlying stock
and will be either a cash payment equal to the original principal
amount of the securities or a predetermined number of shares of
the underlying stock.
Any stock delivered at maturity will have a cash value below
the original principal amount of the securities, possibly significantly
below, and such value could be zero. Accordingly, investors may
lose some or all of their initial principal investment in the
The maximum return on the securities is the original principal
amount plus the aggregate fixed coupon payments. Alternatively,
investors may lose all of their principal investment in the securities
and in such case, the only payment investors will receive on the
securities is the aggregate fixed coupon payments. Investors do
not benefit from any price appreciation in the underlying stock.
The Underlying Stock
Reverse Exchangeable Securities may be structured to provide
investors with exposure to virtually any common stock or American
Depositary Receipt that is traded on the New York Stock Exchange,
Nasdaq National Market, American Stock Exchange, Pacific Stock
Exchange, Boston Stock Exchange or Philadelphia Stock Exchange.