Deutsche Bank's $6.96 million knock-out notes linked to Apple stock seen as timely play

By Emma Trincal

New York, Jan. 26 - Deutsche Bank AG, London Branch's notes tied to the stock price of Apple Inc. gave investors a timely opportunity to buy low in a deal seen as astutely priced around key corporate news, sources said.

Deutsche Bank priced $6.96 million of 0% knock-out notes due Feb. 8, 2012 linked to the common stock of Apple on Friday, according to a 424B2 filing with the Securities and Exchange Commission.

If Apple stock closes below the initial share price by more than 22% on any day during the life of the notes, the payout at maturity will be par plus the stock return, which could be positive or negative. Otherwise, the payout will be par plus the greater of the stock return and 10%.

Timing is everything

The timing of the deal drew attention from market participants. It was announced after two successive events: Apple's chief executive officer Steve Jobs announcing his leave for health reasons on Martin Luther King Jr. Day and the release of the earnings report on Jan. 18, which included record revenues.

"The guys know the pattern. Every time Apple is about to announce its earnings, the stock rallies. Then it goes down on the day of the earnings and a few more days, and then later it goes back up again. That's the old saying: buy the rumor, sell the news," said Thomas Livingston, director of structured products at Halliday Financial Group.

"It was very tactfully done by Apple. Here is the bad news: Steve Jobs is leaving. Here is the good news: record quarter."

The combination of negative news (Jobs' departure) and the post-earnings sell-off contributed to lower the price even more this time, he said.

At the open on Jan. 18, the earnings release day, the stock traded at $348.48. It went down each day until Friday, when it reaching its low for the week at $326.72. The notes were priced at that level.

"This is great. You get the price at the lower end of the range," said Livingston.

A New York sellsider agreed.

"They priced the deal when the share price bottomed as a result of Jobs' announcement. That's not a bad thing for the investor. It's actually pretty good timing," he said.

The risk of breaching the 22% barrier on the downside is in theory reduced if the initial price is low, he said.

Risk/reward trade-off

But good terms also come with more risk, sources said, which may explain the relatively modest size of the deal compared to prior Apple offerings. Investors may have felt skittish about the future fate of Apple's CEO.

"There's obviously risk if Steve Jobs dies of cancer. Then your 22% is not going to protect you. But I think it's a good opportunity if you remain bullish on the stock," the sellsider said.

A structurer said that the 22% downside protection was very attractive and meant the structure was sensitive to volatility moves.

"After the announcement, volatility spiked and they were able to deliver better terms to that structure. That's because with these knock-out [notes], just like with reverse convertibles, what you're doing is selling volatility," the structurer said.

"Now, is there a risk to breach the 22% barrier given Steve Jobs' health condition? You bet there is. But that's how deals work. Without the Jobs announcement, your barrier would have been 10%, not 22%.

"The more attractive the terms are, the greater the likelihood of a negative event to happen. Terms are always a reflection of what the market opinion is of any given risk. And the deal compensates you for that risk."

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.