Merrill Lynch prices $9.37 million in notes linked to index basket; reverse convertibles continue to abound

By Sheri Kasprzak

New York, Sept. 12 - Merrill Lynch & Co. led structured products news Wednesday with a $9,374,900 index-linked offering in a market otherwise almost saturated with reverse convertible notes.

Those reverse convertibles, market insiders said, are coming in because investors are looking for a ways to make money in a credit-wrecked market.

"This is one of the few places where investors can make money right now," said one market insider. "The big coupons are obviously coming from the highly volatile sectors but right now there is more volatility in the stock market than usual. You're seeing more and more stocks that are volatile."

The market source noted that reverse convertibles linked to banking stocks have also been cropping up.

"You almost never saw banking stocks before," he added.

Of the dozens of reverse convertibles announced Wednesday by Barclays Bank plc, notes are planned linked to Bank of New York Co., Inc., JPMorgan Chase, Merrill Lynch and Washington Mutual.

Beyond reverse convertibles, HSBC USA, Inc. priced $10.2 million in return optimization securities linked to a basket of banking stocks.

Merrill notes have 3-to-1 upside

Looking back to those Merrill notes, the Accelerated Return Notes have 3-to-1 upside exposure, capped at 16.65%.

The 12.5 month notes are linked to the S&P 500, Nikkei 225 and Dow Jones Euro Stoxx 50 indexes.

"It's a standard strategy," said one market source on Wednesday morning. "It's diversified. You've got a U.S., Asian and European index so that makes it appealing to investors. Pretty common."

If the ending basket level is greater than the initial level, the investors will receive par plus triple the principal amount times the ending index level minus the initial level divided by the initial level.

The principal is protected up to a 10% drop. If the index basket drops beyond the buffer, investors will lose 1.1111% for every 1% drop beyond the buffer.

Barclays reverse convertibles

Looking at the Barclays reverse convertibles, the Bank of New York notes have a 9.5% coupon, a six-month term and an 80% knock-in level.

The notes pay par at maturity unless the stock falls below the knock-in level during the life of the notes and ends below the initial share price.

The 12.4% JPMorgan-linked notes have a six-month term and pay par at maturity unless the stock falls below the 80% knock-in level during the life of the notes and ends below the initial share price.

Barclays plans to price 11.75% reverse convertibles linked to Merrill Lynch. Those notes also have a six-month term and pay par at maturity unless the stock falls below the 75% knock-in level during the life of the notes and ends below the initial share price.

The six-month Washington Mutual-linked notes have a 16% coupon and a 75% knock-in level. The notes pay par at maturity unless the stock falls below the knock-in level during the life of the notes and ends below the initial share price.

HSBC's banking notes

In other news, HSBC priced $10.2 million in return optimization securities linked to a basket of banking stocks via UBS Financial Services Inc.

The notes are linked to shares of Bank of America Corp., Bank of New York, Mellon Corp., BB&T Corp., Suntrust Banks Inc., TCF Financial Corp., Zions Bancorp, Kookmin Bank - ADS, Marshall & Illsley Corp., PNC Financial Services Group, Regions Financial Corp., Fifth Third Bancorp, Banco Bradesco - ADS and Mitsubishi UFJ Financial Group Inc. - ADS. Each share represents roughly 7.7% weight in the basket.

The notes have a 16-month term and feature 5% principal protection. Investors will receive at least 5% of their investment at maturity.

Assuming the basket return is positive, the investors will receive par plus the principal amount times the 200% leverage factor times the basket return.

If the basket return is between 0% and minus 5%, the investors receive par at maturity.

If the basket return is less than minus 5%, the investors receive par plus the principal amount times the basket return plus the protection percentage.

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