Reverse Convertible Notes
Some fixed income issues have disclosures (Prospectus) that are particular to that issue that can include details of interest calculations, market baskets or an index. Examples of an investment that would have a separate Prospectus include Market -Linked or Floating Rate notes. If there is a separate Prospectus (which could also be known as an Offering or Disclosure Statement) for an issue it will have a "Prospectus" link with the offering. Look for the Prospectus for each deal with a Prospectus through the link on the FISN Division web site or ask your FISN Division Registered Representative to send it to you. Current disclosures (Prospectus) are made available to purchasers for new issues either by mail or online after the trade date or settlement date. Disclosures/Prospectus for secondary issues were publish at the time of the original offering but may be no longer available. FISN will endeavor to supply a Prospectus for secondary market issues but cannot guarantee availability.
OVERVIEWStructured & Exchangeable Corporate Securities with a fixed rate are short-term, fixed income notes purchased at the FISN Division of Landolt Securities, Inc. National Financial LLC provides Clearing, Custody and Safekeeping services for Landolt Securities. These structured notes are each tied to the performance of a referenced equity security or index. These notes disburse a fixed payment, monthly or quarterly, comprised of an interest component . There is a risk component tied to the volatility of the share price of the referenced equity. A credit quality evaluation looks at the rating of the issuer and the referenced equity. The structured and exchangeable securities offered by the FISN Division carry an investment grade credit rating and C If the share price is more volatile, the payout is higher. At maturity, either the investment principal is returned or referenced stock is delivered in exchange. Corporate issuers use brokerage firms to distribute these investments nationwide. The FISN Division of Landolt Securities, Inc. has access to inventory from most Wall Street firms. Investors can select corporate securities that meet their needs for credit quality, yield and return of principal. Even though this security is it a corporate debt security it is a complex instrument; the instrument is far more complicated than the traditional corporate bond with a fixed interest rate and maturity. Investors are urged to read the Prospectus carefully and talk to their FISN representative before selecting an investment.
PROCESSInvestors open a standard brokerage account at the FISN Division of Landolt Securities, Inc. Accounts are held at National Financial Services LLC., which provides Clearing, Custody and Safekeeping services for Landolt Securities. A brokerage account may hold many different securities. It is not necessary to open a new account for each security purchase. If you already have an FISN brokerage account, you may purchase your income investments immediately. If you have opened a new account you need to fund the account by sending a fed funds wire or a check. Once funds have been received, you may begin purchasing securities. The FISN Division of Landolt Securities, Inc. sends new account paperwork and any additional brokerage forms to the customer or they may be downloaded from our Forms page. Paperwork is returned to the FISN Division of Landolt Securities, Inc. along with the required identification. See ID requirements below. Confirmation of each securities trade and account statements are sent for each account to the investor from National Financial Services LLC on behalf of the FISN division of Landolt Securities.
CREDIT QUALITYIssuers of Income Investments offered by the FISN Division of Landolt Securities, Inc. carry an Investment Grade credit rating. Non-Investment grade securities (a rating below BBB) are occasionally offered and are labeled as such. Low rated investments are often termed “junk” for a reason. A credit rating is the measurement of the financial strength of a bond issuer. This measurement helps an investor understand an issuer’s ability to make timely interest payments and repay the investment principal upon maturity. Generally, the higher the credit quality of a bond issuer, the lower the interest rate paid by the issuer because the perceived risk of default is lower. Credit quality ratings are provided by nationally recognized rating agencies. The securities are not bank deposits and are not FDIC insured, even when the issuer is a bank. The FDIC insures bank deposits not bank-issued securities. . The following is an explanation of the top credit ratings. The rating for each individual investment should be evaluated based the rating criteria. Both credit rating of the issuer and the credit rating of any underlying security of the investment (such as Reverse Exchangeable securities) should be considered when making an investment decision. Credit ratings fluctuate with business conditions. Upgrades and downgrades in credit ratings change the risk profile of issuers and possibility the market prices of their securities.
Investment GradeAAA ratings denote the highest rating assigned. This rating is assigned to the "best" credit risk relative to all other issuers or issues. AA ratings denote a very strong credit risk relative to other issuers or issues. The credit risk inherent in these financial commitments differs only slightly from the highest rated issuers or issues. A ratings denote a strong credit risk relative to other issuers or issues. However, changes in circumstances or economic conditions may affect the capacity for timely repayment of these financial commitments to a greater degree than for financial commitments denoted by a higher rated category. BBB ratings denote an adequate credit risk relative to other issuers or issues. However, changes in circumstances or economic conditions are more likely to affect the capacity for timely repayment of these financial commitments than for financial commitments denoted by a higher rated category. Below Investment Grade BB ratings denote a fairly weak credit risk relative to other issuers or issues. The payment of the financial commitments is uncertain to some degree and capacity for timely repayment remains more vulnerable to adverse economic change over time. B ratings denote a significantly weak credit risk relative to other issuers or issues in the country. Financial commitments are currently being met but a limited margin of safety remains and capacity for continued timely payments is contingent upon a sustained, favorable business and economic environment. See Corporate Bond Ratings chart for a simple description and comparison of credit quality ratings issued by S&P, Moody’s and Fitch.
INVESTMENT FEATURESStructured & Exchangeable Corporate securities with fixed rates of interest are unsecured and un-subordinated obligations of the corporate issuer. These notes are issued by large, worldwide banking and investment companies for terms usually of three months to one year. The notes are not FDIC insured. The FDIC insures deposits not debt of corporations even if they are banks. The issuer has no relationship to the exchangeable equity security or index which is used as a reference for the investment return. These structured corporate notes pay interest monthly or quarterly for the full term. Interest rates are quoted on a per annum basis. In some cases, the notes will be listed on the American Stock Exchange. At maturity, the note is redeemed in cash for the original purchase price or exchanged for the common stock of the referenced exchangeable equity issue. Only the issuer, not the investor or the broker, can make the redemption payoff determination. At the maturity, if the Final Share Price of the reference common stock or index is higher than the Initial Share Price (or never fallen below the Downside Protection level of the Initial Share Price during the term) a cash payment is made. If the Final Share Price at maturity has fallen below the Initial Share Price (and the price of the reference equity or index has fallen below the protection level of the Initial Share Price sometime during the term) common stock of the referenced company is returned at a price ratio established at issuance. (Downside Protection is breached when the referenced shares have traded or closed below the protection level during the term). Read the Prospectus carefully to insure you understand the price levels below which the stock may not fall without triggering a return of shares rather than cash at maturity. The notes have no principal protected since the value of the investment will be less if shares are paid out rather than cash. The credit rating of the issuer is an indication of the credit standing of the issuer and not of the Exchangeable Equity Security. The creditworthiness of the issuer does not affect or enhance the likely performance of the investment other than the ability of the issuer to meet its obligations therein. The credit rating of the stock linked to the issue should also be considered. This rating impacts the interest rate offered by the security and the possible price performance of the stock. Lower rated stock will offer higher interest rates but could have a more volatile price leading to a greater likelihood of return of stock rather than cash. The investor does not participate in any price appreciation of the stock. If the underlying stock is worth more at maturity than at purchase, the investor will receive the principal back in cash not stock. The interest received from the issuer will help off-set this but may not completely cover the appreciation. Key information is issuer, the reference security, the credit quality of both the issuer and reference security, the interest rate, the downside protection price level, whether the protection price is breached by a daily closing price or any trade price during the term, and the maturity date. There is no early withdrawal permitted but the notes can be sold in the secondary market. Notes sold prior to maturity are subject to market conditions and could result in a loss. Exchangeable securities are short-term investments and the bid price in the secondary over-the-counter will be reflected in the performance of the underlying stock. Interest paid into the brokerage account can be paid out via checks or electronic funds transmission straight to your local bank. You can set up a payment schedule called a "Custom Payment/Earning Plan. The form is available on the Forms page. Available cash also can be withdrawn from the account via checks, automatic teller machines or debit card. There may be fees for accounts with ATM or debit cards. Read each linked Prospctus for a complete explanation of each referenced security or index and each issue. See A Guide to Understanding Reverse Convertible Securities. See FINRA Investor Alert on "Reverse Convertibles - Complex Investment Vehicles".
ID REQUIREMENTSIncome Investments are held in a Brokerage account of the FISN Division of Landolt Securities, Inc. Securities in Landolt Securities accounts are carried by National Financial Services LLC, Member NYSE/SIPC, a Fidelity Investments company which provides Clearing Custody and Safekeeping services. The FISN Division of Landolt Securities, Inc. is required under the Patriot Act to verify the identity of individuals and entities. Individuals are required to provide a copy of a current government issued, photo identification. Business accounts, trusts and other non-individual accounts have special requirements. Ask your FISN Representative what documents will be required to open up a particular type of account.
FEESThere are no investment fees or commissions paid by the investor for interest income investment. The issuers of the securities pay brokers to distribute their newly issued securities nationwide. New issue securities are sold at par or a price of 100.00 for each $100.00 of the issue bought by investor. Par is the face amount of the investment on which interest is earned. Most investments require a minimum purchase amount. Secondary market securities are bought from or sold net to the investor without an additional commission, and are usually offered at a current market price indicating a discount or premium to par because interest rates have changed-whether up or down-since the security was first issued.
UNIQUE RISKS FOR FIXED RATE, STRUCTURED & EXCHANGEABLE CORPORATE SECURITIESFixed rate corporate securities coupled with a structured or exchangeable component present unique risks related to the lack of principal protection at maturity. This risk arises from the underlying security tied to the issue. If the value of this security (typically a stock) is down from the initial value relative to the final value at the maturity date (and any downside protection price level was breached), shares of the security will be returned to the investor and not the cash value of the principal invested. The risk is that the stock will be worth less than the principal initially invested. The stock can be held in the brokerage account but if it is sold immediately there will be real loss in principal. The investor should weigh the benefits of holding the security in hope of a price rise or risk selling the stock immediately at the current lower price. The issuer is in effect reserving the right to give stock back at maturity that is worth less then the principal paid for it. Investors in structured and exchangeable securities should ask themselves if they would be willing to buy the stock outright. The interest rate paid on the investment by the issuer is the relative to the volatility of the stock. Riskier stocks will pay higher interest; more stable stock will pay lower rates. Do not choose your investment based solely on the interest rate. Occasionally, an issuer will not return stock but less principal at maturity. This feature is disclosed in the offering documents (Prospectus). The investor does not participate in any price appreciation of the stock. If the underlying stock is worth more at maturity than at purchase, the investor will receive the principal back in cash not stock. The interest received from the issuer will help off-set this but may not completely cover the appreciation. Only the issuer can exercise a call, not the account holder or the broker.Companies usually call an issue when rates have fallen and they can replace the funds at a lower rate. The risk is that, even though you get back your full principal, when you go to reinvest these funds, it will earn a current, lower rate. Never rely on a call to receive funds back from an investment early. It is possible that even if rates have fallen that the issuer will not call an issue Calls cannot be predicted since companies consider only their own funding needs and costs.
OVERVIEWFixed income securities are less liquid than trading investments such as stocks. Fixed income securities are designed to be held long term or to maturity rather than be bought and sold. A Fixed Income investor can reclaim their funds by liquidating an investment through a variety of methods. Investments can be sold in the over-the-counter market and a few fixed income investments have a payment at death feature or “death put”.
Reverse Convertible Notes
|Maturity Date||1.25 Years|
|Issuer Name||Various Equities|
|Non-Callable Period||6 Months - AutoCallable|