Reverse convertibles may be impacted by huge drop in stocks; Merrill prices notes linked to S&P 500

By Sheri Kasprzak

New York, Feb. 28 - Market sources said Wednesday that a dive in the Dow Jones Industrial Average on Tuesday may impact some reverse convertibles with high thresholds, but seemed rather nonchalant about it.

"I think it could be an issue for investors in [reverse convertibles with] high thresholds," said one market source based in New York.

"That's the risk you take though. When you invest in something like that, you take on the risk with it."

Another equity structurer agreed that there could be some concerns for investors with high-threshold notes, noting that some barriers have likely already been hit thanks to the drop in stocks.

Higher coupons possible

Yet another market source said the drop could also affect pricing of upcoming reverse convertible deals.

"It probably will mean higher volatility and that could mean bigger coupons, at least for shorter-term offerings," he said.

For longer-term deals, the market source said he didn't feel the coupons will be impacted that much.

The market source noted that the stock dive could send more investors looking for principal-protected offerings.

After a sudden downdraft in Chinese stocks and weak economic data sparked a frenzy of selling activity Tuesday, the Dow Jones Industrial Average sank by more than 416 points to end at 12,216.24. The Nasdaq composite index fell by 96.65 to close at 2,407.87 and the Standard & Poor's 500 composite index closed down 50.33 to end at 1,399.04 on Tuesday. The stock market recovered somewhat on Wednesday, however, with the Dow gaining 52.39 to end at 12,268.63 and the Nasdaq climbing 8.29 to close at 2,416.15. The S&P 500 gained 7.78 to end at 1,406.82.

Merrill prices $15.23 million note

In other structured products news, Merrill Lynch & Co. sold $15.23 million in 0% buffered return enhanced notes linked to the S&P 500 index through J.P. Morgan Securities Inc.

Payout at maturity for the 19-month notes will be par plus double any gain on the index up to 17%. Investors receive par at maturity if the index declines by 10% or less and will lose 1.1111% for every 1% the index declines beyond 10%.

UBS plans notes linked to currency basket

Elsewhere in structured products, UBS AG Jersey Branch announced plans to price 100% principal-protected notes linked to a basket of currencies.

The basket includes equal weights of the Brazilian real, the Russian ruble, the Mexican peso, the Norwegian krone and Chinese renminbi.

The two-year notes pay par plus the basket return multiplied by the participation rate - expected to be 300% to 350%. Investors will receive par if the basket return is negative.

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