ABN Amro's $1.5 million 28% reverse convertibles linked to Thornburg indicate continued volatility

By Sheri Kasprzak

New York, Sept. 20 - The mortgage sector has been troubled for quite some time and the sector continue to be volatile, according to market insiders.

An indicator of that may be a 28% coupon on a sale of $1.5 million in reverse convertibles linked to Thornburg Mortgage, Inc. from ABN Amro Bank NV.

"Clearly, the sector has been very volatile over the past several months," said one market source.

"Twenty-eight percent doesn't even seem that big to me, to be quite honest, especially given the volatility in that sector. The coupon will obviously depend on that particular reference stock so maybe their volatility isn't as high as some other mortgage company's stock might be."

Another market source said the coupon seemed high enough for a mortgage lender.

"It's a pretty decent coupon size for a mortgage lender," said a second market observer. "There has been a great deal of volatility in that market so it's not a big surprise to find coupons like this in that sector."

Terms of the notes

The one-year notes pay par at maturity unless the stock falls below a 55% knock-in level during the life of the notes and ends below the $13.46 initial share price.

Should that happen, the investors will receive a number of shares equal to $1,000 divided by the initial share price.

Late last week, ABN Amro priced $1.2 million in 28% Knock-In Reverse Exchangeable notes linked to Thornburg. Those notes had a three-month term and a 60% knock-in level.

So far this month, shares of Thornburg have traded between $11.82 on Sept. 5 and $13.58 on Sept. 13. In August, the stock ranged between $7.61 on Aug. 14 and $25.05 on Aug. 2.

HSBC USA Inc. is expected to price 21% reverse convertibles linked to another mortgage lending name - Countrywide Financial Corp. Those notes are set to price next week.

The Countrywide-linked notes have a six-month term and a 50% knock-in level.

Lehman to price gold-linked notes

Elsewhere, Lehman Brothers Holdings Inc. has a gold-linked note in the works.

The investment bank plans to price capped participation notes linked to gold.

The offering comes after gold reached a 25-year high on Tuesday.

"I do think the recent hype around gold helps somewhat but gold is something we see in commodity-linked notes all the time," said one market source.

On Thursday, gold prices ended up $2.60 at $734.30 per ounce.

In early August, gold was trading just below $660 per ounce. On Tuesday, gold prices soared to $735.50, a 25-year high.

The two-year notes pay par of $10,000 plus double any positive return on gold, capped at 120% of par, assuming the final price of gold is at least 85% of its initial price.

Investors lose 1% for every 1% that gold declines beyond 15%.

Similar deals

In August, Lehman priced $10 million in pyramid notes linked to gold and silver.

Those notes pay par times 102.5% minus the discount factors for gold and silver, both of which are capped at 17.5%. Investors share in any losses. Those notes have 95% principal protection.

© 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.