Merrill prices $228 million in notes linked to basket; Morgan sells $41.5 million in index-linked notes

By Sheri Kasprzak

New York, Oct. 26 - Merrill Lynch & Co. and Morgan Stanley led structured products news Thursday with each pricing notes linked to baskets of international indexes.

One market source noted this week that international indexes are more and more being included in baskets from several countries or regions as opposed to being used individually as the reference for note offerings. The same, he said, is true for currencies and other non-U.S. assets.

On the other hand, another market source noted that a greater number of index offerings are being linked to individual indexes rather than baskets.

But he also observed that from what he has seen the notes that are linked to baskets tend to have at least one non-U.S.-based index in that basket.

"When you see deals linked to, say, the S&P [500 index], most of the time it's just linked to the S&P and nothing else," he said. "But whenever you see the Nikkei [225 index], more often than not it's linked in with a basket. It's a less risky way to invest in a non-U.S. asset. Not all of the weight is just on that index."

Merrill's $228 million notes

In the Merrill offering, the investment bank plans to sell $228 million in 0% accelerated return notes linked to a basket that includes equal weights of the Dow Jones Euro Stoxx 50, the Nikkei 225 and S&P 500 indexes.

The notes, due Jan. 3, 2008, pay triple any gain on the basket with an $11.65 cap.

The same indexes will be linked to other offerings coming up.

Credit Suisse (USA), Inc. plans to price 0% ProNotes linked to the S&P 500 index, the Dow Jones Euro Stoxx 50 and the Nikkei 225 index. But those notes do not carry equal weights of the indexes. The S&P will carry 40%, Euro Stoxx will carry 30% and the Nikkei will carry 30%. The deal is scheduled to price later this month.

In November, Merrill plans to price 0% principal-protected notes linked to equal weights of the same three indexes. The notes will be due November 2010. Royal Bank of Canada intends to price two issues of 0% principal-protected senior notes also linked to the three indexes. Both notes are set to price on Friday. One will mature Oct. 30, 2009 and the other on Oct. 31, 2011.

Morgan plans similar deal

Similarly, Morgan Stanley negotiated a $41.5 million issue of 0% capital-protected notes linked to a basket that includes equal weights of the Dow Jones Industrial Average, Dow Jones Euro Stoxx 50 and Nikkei 225 indexes.

Payout at maturity will be par plus any positive return on the basket. The investors in the deal will at least receive par.

Citigroup prices Toll Brothers ELKs

Elsewhere in structured products news, Citigroup Fund Inc. priced its previously announced Equity-Linked Securities (ELKs) linked to the stock of Toll Brothers, Inc.

The securities bear interest at 15.75% annually and, at maturity, pay par in cash unless the stock drops below 77.5% of the initial level. Under that circumstance, the notes pay 0.34294 shares of Toll Brothers for each $10.00 in ELKS.

One equity structurer said Thursday that the home-building business isn't the best to be in right now, but stocks like Toll Brothers' are ideal for reverse convertible offerings and the like.

"Well, we assume their stock isn't going to move substantially up or down for a while," he said. "For reverse convertibles, you're looking for something that's going to be still for a while and [Toll Brothers] seems ideal for something like that."

In October, the stock has traded between $28.18 and $30.79 (NYSE: TOL). On Thursday, the stock gained 6 cents to end at $30.50.

Barclays priced Toll deal

In September, Barclays Bank plc priced $2 million 13.75% reverse convertibles linked to Toll Brothers' stock.

Those notes, due Sept. 28, 2007, carry a knock-in level of 75%.

Also in September, Calyon negotiated a $10 million issue 13.25% reverse convertibles linked to Toll Brothers.

The notes are due Sept. 28, 2007 and also carry a knock-in level of 75%.

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