Headlines spur individual stock-linked products; First Republic sells for Merrill; Morgan Stanley ties to soy

By Kenneth Lim

Boston, Feb. 7 - A number of company-specific products have emerged recently, and market insiders say the trend has mostly been news driven.

"The products that are going to sell are always going to be the ones that investors are thinking about," said a structurer. "Good news or bad news, there's always a position that you can take."

ABN Amro Bank NV on Wednesday announced a slew of three-month knock-in reverse exchangeable securities due May 30, 2008 linked to individual stocks, among them volatile names such as New Orleans-based mining company Freeport-McMoRan Copper & Gold Inc. and names that recently made the headlines, such as Mountain View, Calif.-based internet search giant Google Inc.

The ABN Amro securities will pay the principal in cash upon maturity if the underlying stock has not closed below the knock-in level during the term of the securities. If the underlying stock price is lower than the initial stock price at the determination date, the payout at maturity will be the number of shares of the underlying stock equal to par divided by the initial price. Otherwise the payout will be par.

The Freeport-McMoRan-linked securities have an annual coupon rate of 12.5% with a knock-in level of 65% of the initial stock price. The Google-linked securities have a 14.5% annual coupon rate and an 80% knock-in level.

A day earlier, Royal Bank of Canada also said it will price a series of 13.5% reverse convertible notes due May 29, 2008 linked to the common stock of D.R. Horton Inc., a Fort Worth, Texas-based homebuilder. The notes have a knock-in level at 60% of the initial stock price.

"Some of these products are tailor made for private clients who want to make a certain kind of bet, but names like Google here could also appeal to the retail market," the structurer said. "It's a name most people recognize, they understand why the stock's been moving, the [proposed] Microsoft-Yahoo merger, so it's quite accessible to the retail segment."

The structurer said short-term knock-in reverse convertibles were a common structure for such offers.

"It's a pretty straightforward structure," the structurer said. "It's usually only for about three months so it doesn't lock up your money for very long and it isn't as risky, and it's a simple reverse structure with no bells and whistles. It's a bread and butter kind of product."

First Republic to sell deals

First Republic Securities Co. LLC, a private-banking division of Merrill Lynch Bank, has been getting involved in its parent's deals.

First Republic and Merrill are joint underwriters in two Merrill deals that priced on Tuesday. The first was a $263 million series of 0% Strategic Accelerated Return Notes due April 6, 2009, linked to the S&P 500 index, according to a 424B3 filing with the Securities and Exchange Commission. The payout at maturity will be par of $10 plus triple any index gain, subject to a capped return of 20.04%. Investors are fully exposed to an index decline. The notes will be listed on the American Stock Exchange under the ticker "NMQ."

The second series was $46.7 million of 0% Strategic Accelerated Redemption Securities due Feb. 8, 2010, linked to the Nasdaq 100 index. If the index closes at or above its starting level on any of three observation dates, the notes will be called with a call premium of 12.35% per year. For each $10 security, the redemption amount will be $11.2350 if called on Feb. 9, 2009, $11.8525 if called on Aug. 6, 2009 and $12.4700 if called on Feb. 1, 2010.

If the notes are not called, the payout at maturity will be par if the final index level is at least 90% of the initial level. Otherwise, investors will lose 1% for each 1% that the index declines beyond 10%.

Morgan Stanley links to soybeans

Commodities continue to see interest, with Morgan Stanley announcing plans to price a series of 0% Performance Leveraged Upside Securities (PLUS) due February 2010 linked to the price of soybeans, according to a 424B2 filing with the Securities and Exchange Commission.

If the final price increases, the payout at maturity will be par plus 120% to 135% of any gain on the price of soybeans. Otherwise, the payout will be par minus any price decline.

The notes are expected to price and settle in February.

Morgan Stanley & Co. is the agent.

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