Suntech Fall Highlights Risks of Structured Notes Tied to Stocks

The plunge in shares of Suntech Power Holdings Co., the Chinese solar-panel maker forced into bankruptcy last month, highlights risks with structured notes that can leave investors exposed to collapsing equities.

Deutsche Bank AG sold three-year notes linked to Suntech’s American depositary receipts in four offerings from February to May in 2011, according to data provided by the issuer to Bloomberg. In return for paying coupons as long as the shares remain in certain ranges, the reverse-convertible notes at maturity force the buyers to take the underlying asset at lower values than their initial investments if a drop in the stock exceeds predetermined levels, according to the data.

“If you’re buying a reverse convertible, there is a possibility you end up tracking a stock down when the stock collapses the way Suntech has,” Jamie Smith, the chairman of the U.K. Structured Products Association, said by phone. “The risk is always there, and it should be made absolutely clear.”

Suntech became the solar industry’s biggest corporate failure in March, after the company defaulted on $541 million of bonds. The ADRs dropped to a record low of 36 cents on April 1. That’s a 96 percent slide since Deutsche Bank sold the first of its notes tied to the securities on Feb. 3 2011, according to Bloomberg data. The products are the only notes of their kind tied solely to Suntech’s stock, the data show.

Amy Chang, a Hong Kong-based spokeswoman at Deutsche Bank, declined to comment on terms of the securities. Queries sent by e-mail to a generic address for the company’s Tokyo staff handling matters related to the products weren’t answered.

Buyout Speculation

While Suntech’s shares rallied in New York on April 8 following a report billionaire Warren Buffett may be interested in buying the company, such speculation likely won’t prevent an eventual delisting, according to Gordon Johnson, a New York-based analyst at Axiom Capital Management Inc. It’s only “a matter of time” before the stock is delisted, Johnson wrote in response to e-mailed questions.

The shares surged 16 percent on April 8 after a news service owned by the Hong Kong Economic Times said Buffett’s MidAmerican Energy Holdings Co. may buy the company. Tina Potthoff, a spokeswoman for MidAmerican in Des Moines, Iowa, said by e-mail the company doesn’t comment on speculation.

Suntech’s stock, which reached a record high at $88.35 in December 2007, was at 62 cents April 9. Its decline has also led to lost principal on certain U.S. reverse convertibles that had protection buffers of 25 percent to 30 percent.

Lost Principal

Bank of Montreal issued $641,000 of three-month notes tied to Suntech in one U.S. offering in 2011 and Barclays Plc sold a total of $5.25 million of the securities with maturities ranging from three to six months in five placements the previous year, according to data compiled by Bloomberg.

All except for two of the products cost the buyers’ principal at maturity, according to terms in prospectuses for the notes filed with the U.S. Securities and Exchange Commission. Martha McInnis, a spokeswoman for Bank of Montreal, didn’t respond to an e-mail seeking comment on the securities. Mark Lane, a spokesman for Barclays, declined to comment by e-mail.

Suntech’s founder Shi Zhengrong became one of the world’s first solar billionaires. The company hasn’t reported a profit since the first quarter of 2011 as a supply glut drove down prices and damped margins.

“Nobody knows what the market’s going to do in the future,” U.K. Structured Products Association’s Smith said. “Unfortunately, this company has been doing very, very badly. Anybody with an investment link to it is going to have to suffer.”