Reverse convertibles linked to mortgage lenders a sign of bad times; HSBC, SG to price IndyMac notes

By Sheri Kasprzak

New York, Sept. 11 - An influx of mortgage lender-linked reverse convertibles tells a woeful tale, according to market insiders Tuesday.

Another surge of offerings linked to General Motors Corp. warns of potential troubles in the auto manufacturing sector as well.

Both HSBC USA, Inc. and SG Structured Products, Inc. recently announced plans to price offerings linked to mortgage lenders IndyMac Bancorp, Inc. and Countrywide Financial Corp.

The coupons on several reverse convertibles linked to mortgage-lending names have been incredibly high recently.

"It's been a complete mess," said one market source of the mortgage-lending sector.

"Coupons are high because volatility is high. That's not the only reason though. There are several, not the least of which is the current credit crunch. If you've got the stomach for it, this is a good way to make some money, though."

"There is a bit of a stigma behind mortgage lenders right now," said a market insider. "Volatility is pretty high for most of these companies so it's really no surprise you're seeing the bigger coupons."

HSBC, SG plan offerings

Moving to specific deals, HSBC intends to price 32.2% reverse convertibles linked to IndyMac and SG has plans to price 21.25% notes linked to IndyMac.

Both notes have a three-month term.

The HSBC notes pay par at maturity unless the stock falls below the 60% knock-in level during the life of the notes and ends below the initial share price.

The SG notes pay par at maturity unless the stock falls more than 30% during the life of the notes and ends below the initial share price.

In both cases, should these conditions be met, the notes pay a number of shares equal to $1,000 divided by the initial share price.

The two notes are set to price Sept. 25.

HSBC plans to price notes linked to Countrywide with a 21% coupon and a six-month term.

The notes pay par at maturity unless the stock falls below the 50% barrier price during the life of the notes and ends below the initial share price. The notes then pay a number of shares equal to $1,000 divided by the initial share price.

Those notes are set to price Sept. 25.

For the month of September, shares of IndyMac traded between $21.41 on Sept. 7 and $23.99 on Sept. 4.

In August, IndyMac's stock traded in a range between $19.00 on Aug. 15 and $24.50 on Aug. 23.

In August, Countrywide shares traded between $18.95 on Aug. 16 and $18.95 on Aug. 8.

The stock has traded between $17.21 on Sept. 10 and $19.81 on Sept. 4 so far this month.

SG's Toll Brothers-linked notes

In news related to the troubled home-building market, SG said it intends to price Tempo ReConvs linked to the stock of Toll Brothers, Inc.

The six-month notes pay an annualized coupon of 21.5%.

The notes pay par at maturity unless the stock falls by more than 30% during the life of the notes and ends below the initial share price. The notes then pay a number of shares equal to $1,000 divided by the initial share price. The notes will automatically be called at par plus interest if the closing price of the stock on Dec. 21 is equal to or greater than the initial share price.

The notes are expected to price Sept. 25.

Slate of GM-linked notes

Elsewhere, SG and Royal Bank of Canada both plan to price several offerings of reverse convertibles linked to the stock of General Motors.

SG plans to price notes linked to GM with a 17.3% coupon and a one-year term.

RBC intends to price GM-linked notes with a 17.55% coupon and a six-month term, as well as notes with a 19.85% coupon and a six-month term. RBC also has an offering planned with an 18.15% coupon and a three-month term.

RBC also has an offering of reverse convertibles linked to GM with a 26.4% coupon and a three-month term, as well as an offering of 13% notes with a six-month term.

The 17.3% notes from SG pay par at maturity unless the stock falls by more than 30% during the life of the notes and ends below the initial share price. The notes will then pay a number of shares equal to $1,000 divided by the initial share price.

RBC's 17.55% notes pay par at maturity unless the stock falls by more than 35% during the life of the notes and ends below the initial share price. The notes will also pay a number of shares equal to $1,000 divided by the initial share price.

The 19.85% notes also pay par unless the stock falls by more than 30% and the final share price is less than the initial share price. The notes then pay a number of shares equal to $1,000 divided by the initial share price.

The 18.15% RBC notes also pay par unless the stock falls by at least 30% during the life and ends below the initial share price. The notes will then pay a number of shares equal to $1,000 divided by the initial share price.

The 26.4% notes pay par unless the stock falls by more than 20% during the life of the notes and ends below the initial share price. The notes will then pay a number of shares equal to $1,000 divided by the initial share price.

The 13% notes pay par unless the stock falls by more than 40% during the life of the notes and ends below the initial share price, at which point the notes pay a number of shares equal to $1,000 divided by the initial share price.

All of those notes price Sept. 25.

In August, shares of GM traded between $29.18 on Aug. 28 and $34.85 on Aug. 9.

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