Take advantage of increased share prices
A Reverse Convertible Note combines characteristics of bonds and equities. The principle is the same as that of a convertible bond. However, in the case of a Reverse Convertible Note, it is the issuer who has the right to deliver the underlying shares rather than repaying the nominal cash amount at maturity.
Technically, the note is structured as the combined purchase of a bond and sale of a put-option to the issuer. He will exercise this right if the underlying is trading below the strike price at maturity.
A reverse convertible pays a guaranteed coupon which is far higher than the market return of comparable maturities. The redemption of the principal is not, however, guaranteed. It is generally the case that the higher the coupon, the greater the risk.
The advantage for the issuer is that a reverse convertible limits additional balance-sheet leverage and minimises earnings dilution.