Lehman's high-coupon InterOil offering linked to 105% volatility, analyst says

By Sheri Kasprzak

New York, July 13 - A London-based analyst said Friday that Lehman Brothers Holdings, Inc.'s recently announced 44.2% reverse exchangeable note offering linked to InterOil Corp. achieved such a high coupon because of a spike in the stock's volatility.

"[The] 90-day historic volatility for InterOil is 105%," said Tim Mortimer, managing director of Future Value Consultants, a firm that analyzes derivatives products.

"We would expect the implied volatility from options to be rather lower than this because the recent past was exceptionally volatile and there may be a lot of option sellers already collecting high premiums."

In June, the stock dove from the $43.94 level on June 25 to $18.94 on June 29. On June 26 alone, the stock gave up $13.61.

The company's stock has traded between $18.94 on June 29 and $43.94 on June 25 in June and so far this month, the stock ranged between $24.11 on July 2 and $26.75 on July 5. It plunged in late June after the company released an update on its Elk-2 gas appraisal and oil exploration well in the Eastern Papua Basin.

On Friday, the stock remained unchanged at $26.00 (Amex: IOC).

Trigger price is $17

"The trigger price is $17 [per share]," Mortimer said. "Even when it dipped down, it wasn't below $17. You certainly wouldn't expect a blue-chip stock to be in that much trouble in three months' time. For a high-volatility stock, it's a high coupon. You really need to pay attention to the short term."

Mortimer noted that if the investor thinks the stock has fallen the most it's going to over the three-month period, "it's a reasonable play."

The three-month notes pay par at maturity plus the coupon if the stock does not fall below the 70% knock-in level during the life of the notes and does not end below the initial share price.

If those things should happen, the notes pay a number of shares equal to $1,000 divided by the initial share price at maturity.

The notes are expected to price July 26.

JPMorgan prices $1 million deal

As previously noted, JPMorgan Chase & Co. priced $1 million in reverse exchangeable notes linked to InterOil earlier this month. Those notes have a huge 67% coupon.

The three-month notes pay par at maturity unless the stock falls by more than 40% during the life of the notes and finishes below the initial share price of $25.22.

Should that occur, the notes pay a number of shares equal to $1,000 divided by the initial share price or, at the investment bank's option, the equivalent cash value.

Lehman, on June 29, just after the stock dove to its lowest level of $18.94 in June, Lehman Brothers announced plans to price a 30% offering of reverse exchangeable notes linked to InterOil with a three-month term.

Those notes also pay par at maturity unless the stock falls below the 60% knock-in level during the life of the notes and finishes below the initial share price. If that should happen, the investors receive a number of shares equal to $1,000 divided by the initial share price at maturity.

Eksportfinans's Turkish lira bull notes

Elsewhere, Mortimer said Eksportfinans ASA's recently announced bull notes linked to the Turkish lira versus the U.S. dollar and the euro are interesting.

"The initial value of both the lira against the dollar and euro is taken as the forward rate, where the market is predicting where it's going to be in one year with the final rate being the actual rate," Mortimer said in a Friday interview. "Normally, it's the stock value today and the stock value in one year."

The notes are linked to equal weights of the U.S. dollar and the euro. At maturity, the investors will receive 98% of par plus the product of any basket return and the performance across the life of the notes of the Turkish lira against the dollar.

Payout at maturity will be at least 98% of par.

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