Merrill Lynch prices $11.2 million bear market notes linked to S&P 500; Svensk plans 0% notes

By Sheri Kasprzak

New York, Sept. 14 - Merrill Lynch & Co., Inc. set the terms of $11.2 million in 0% medium-term notes in the accelerated return bear market notes structure linked to the Standard & Poor's 500 index Thursday, the second bear market notes priced this week.

At maturity on June 14, 2007, the notes pay triple the absolute value of any decrease on the index, capped at $13.45 per $10.00 unit. If the index gains, the investors will lose proportionally down to a $5.00 floor.

The notes, according to a prospectus filed with the Securities and Exchange Commission Thursday, are intended for investors who believe the level of the S&P 500 index will decrease over the term of the notes and who are willing to risk losing up to $5.00 per unit if the level of the index increases over the note term.

"We haven't done much with these, so I can't tell you why you're seeing so many," said one equity structurer when asked about the popularity of the bear market notes this week.

"If you're looking at the long-term expectations of the S&P [500 index], every indication is that it's headed for a rally.

'Kind of baffling'

"So it really is kind of baffling. I would bank on advances, but nothing's certain, so I guess anything is possible."

Even so, Merrill is not the first investment bank to price bear market notes linked to the S&P 500 index this week.

On Monday, Morgan Stanley priced a $227.161 million add-on to 0% notes in the Bear Market Performance Leveraged Upside Securities structure linked to the S&P 500.

Those notes are due March 5, 2008 and were priced at 100.2412245.

The notes are in addition to $236.5 million in securities the bank priced on Aug. 25, bringing the total deal size to a huge $463.661 million.

The payout at maturity for those notes is equal to par plus triple the absolute value of any negative return on the index, capped at $1,750 per $1,000 in principal of the note. The payout will be equal to par if the index increases by 7% or less and investors will lose 1% for each 1% the index increases beyond 7%. The initial index value was 1,294.413.

On Thursday, the S&P 500 closed down 1.79 at 1,316.28.

Svensk plans outperformance notes

On the upside, AB Svensk Exportkredit announced its plans Thursday to price 0% enhanced outperformance notes linked to the S&P 500 and Russell 2000 indexes.

The notes are due in two years.

Payout at maturity will be based on the performance of the indexes, with the S&P 500 as the long index and the Russell 2000 as the short index.

If the percentage increase of S&P exceeds that of the Russell, holders will receive par plus triple the percentage by which the long index outperformed the short index. The total return will be capped at between 36% and 40.5%, with the exact cap to be determined at pricing.

If the percentage increase of the Russell index exceeds that of the S&P index, however, investors will receive par minus the percentage by which the long index under-performed the short index.

Goldman, Sachs & Co. will be the underwriter.

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