The adjustable note is a variation of the frequent reverse convertible (cash or share) issues. The basic reverse convertible is when you get 1 share at redemption up to a certain point, or cash if the share price is higher. Usually, cash or share notes bear a high coupon, double digit for a year.
This one gives you 1 share, up to todays price S, then 1 / [(F - S) / S ] up to F = 1.2 x S, then 1 / 1.2
Redemption curve (in $$$ amount, not share) looks like that, roughly
..73.69 .................................... +
+ .
56 11/16 + slope = 0.83
| +
--56 11/16----------------+++++++++----------------------
+ | |
+ 68.025 88 7/16
+
+
+
+
+
The coupon is mentioned, it is 5%, but it did not state whether it's acreeting or paid in cash.
Why do it. Well, a "secured", hedgeable (through shorting the common), low interest bearing loan. Not a bad idea, especially as mentioned, they do not need to sell the stock but maybe pass a previously obtained short position to an investor in the notes.
For SWS, though, it is a way to hedge against a downside of NITE, but participate with a rate of 16.6% on the upside in return for a 5% coupon.
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