Volatility may lift coupons on reverse convertibles; Lehman prices more oil-linked reverse convertibles

By Sheri Kasprzak

New York, Nov. 17 - Volatility among some stocks may be pushing up coupons on reverse convertible offerings, according to more than one market source.

"Obviously, it depends on the volatility of a particular [reference] stock," said one market source when asked about the impact of stock volatility on higher coupons.

"I do think there is some evidence that the coupons on these [reverse convertibles] offerings are getting a bit higher because of [stock volatility]. Look at it this way. The riskier the stock, the higher the coupon. The investors need some reason to want to buy these."

Another market source put it more bluntly.

"Where there's volatility, there are bigger coupons," he said. "It's that simple."

Rabo ups coupon on MasterCard notes

An example of an outright increase in the coupon of a note came on Friday when Rabo Financial Products BV increased the coupon on knock-in reverse convertibles linked to MasterCard, Inc.

The coupon was upped to 16% from 12.6%, the rate set when the deal was announced Nov. 13.

The six-month notes are being offered through LaSalle Financial Services Inc., which claimed in a release Friday that the coupon was raised in response to a "dramatic increase" in volatility of MasterCard's stock.

In September, MasterCard's stock traded between $56.55 and $70.35 and in October, the stock traded between $69.50 and $74.10. So far this November, the stock has traded between $85.07 and $96.55. On Friday, the stock gained 26 cents to end at $94.78 (NYSE: MA).

The MasterCard notes, which have an 80% knock-in price, are set to price Nov. 24.

Payout at maturity will be par in cash unless MasterCard stock trades at or below the knock-in price and closes below the initial price, in which case investors will receive a number of MasterCard shares equal to $1,000 divided by the initial share price.

HSBC to price reverse convertibles

In another offering with a substantial coupon, HSBC USA, Inc. announced its plans Friday to price 15.6% reverse convertibles linked to Frontline Ltd.

The six-month notes, which are set to price Nov. 28, have a barrier level of 75%.

Frontline has been linked to reverse convertible notes before.

ABN Amro Bank NV priced $3.6 million in 17.75% reverse exchangeables linked to Frontline earlier this year.

The one-year notes were priced April 4.

Lehman prices more crude-linked notes

In other reverse convertible news, Lehman Brothers Holdings Inc. said late Thursday it upsized by $370,000 its previously announced offering of single-barrier synthetic reverse convertibles linked to light sweet crude oil.

The investment bank priced $1 million of the one-year notes on Wednesday.

As previously mentioned, the notes pay par plus 9.05% at maturity. If the price of crude oil falls below the barrier during the life of the notes and finishes below the initial price, a percentage equal to the final decline will be subtracted from the payout.

On Thursday, Lehman said it intends to price 100% principal-protected "Wedding Cake" notes linked to light sweet crude.

Insiders said earlier this week that crude oil is becoming attractive to buyers of reverse convertibles because oil prices have fallen into a range.

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