HSBC withdraws issue of 23% reverse convertibles linked to E*Trade

By LLuvia Mares and Sheri Kasprzak

New York, Nov. 14 - HSBC USA Inc. took the unusual step of announcing it was pulling a deal, an offering of three-month 23% reverse convertible notes linked to the common stock of E*Trade Financial Corp. - and the action may not be the last of its kind, given the current volatility in the markets.

The move came after E*Trade stock plummeted in response to a report from Citigroup equity analyst Prashant Bhatia raising the possibility that the company might file for Chapter 11. E*Trade denied the report and the stock subsequently recovered partially.

"Hopefully the firm issuing this didn't get hit by pre-hedging," said a market specialist. "If so it didn't seem like it was a lot, about $5 million or something. It looks like they actually had the hedge they were building and then the deal got broken because of the Citigroup analyst report that gave it 15% possibility that E*Trade could go bankrupt."

According to HSBC's filing with the Securities and Exchange Commission announcing the move: "The withdrawal is due to publicly disclosed information relating to, and unusual trading activities in the common stock of, E*Trade Financial Corporation."

"By the time E*Trade said that was not the case, there was volatility in the stock. It would be very interesting to see if they bring that deal next month when things kind of settle down on E*Trade," the specialist said.

"But it's one of those rare situations where volatile stock gets whacked with a piece of bad news as it's getting priced up in the middle of an offering period.

"In this market this may not be the last time we see something like that happening - where a deal is pulled anecdotally based on bad news. We are in a period where there is always going to be bad news around single names or rumors around single names and that can have an impact on the reverse convertible market going forward."

The offering was originally proposed in a prospectus filed on Nov. 5.

JPMorgan prices more iShares notes

In other news Wednesday, JPMorgan Chase & Co. priced another offering of buffered return enhanced notes linked to iShares MSCI Emerging Markets index fund, this time for $1.621 million.

"I just think investors are interested in the structure," said one market insider. "Obviously, it's a very popular structure. Investors really like the payout and it just seems like a pretty straightforward reason why they're popular."

The one-year notes pay par plus the principal amount times double the return on the MSCI Emerging Markets fund, subject to a maximum payment of 24.6%, assuming the final share price is greater than the initial price.

The principal is protected against up to a 15% decline of the index fund at maturity. If the final share price declines by more than 15%, investors will lose 1% for every 1% the index fund declines beyond 15%.

Other offerings

On Tuesday, JPMorgan priced $10 million in knock-out return enhanced notes linked to the iShares MSCI Emerging Markets index fund.

Those notes also have a one-year term and pay par plus the principal amount times the 37.25% knock-out rate, assuming a knock-out event occurs. A knock-out event will occur if the closing price of one share of the index fund is greater than the knock-out price.

If a knock-out event has not occurred and the final share price is greater than the initial price, investors will receive a cash payment of double par, subject to a maximum total return on the notes of 74.5%. If the share return is equal to 37.25%, the investors will receive the maximum total return of 74.5%.

If a knock-out event has not occurred and the final share price is equal to the initial share price, investors receive par at maturity.

If a knock-out event has not occurred and the final share price is less than the initial share price, the investors will be exposed to any declines.

Earlier this month, JPMorgan priced $1 million in similar notes.

If the exchange-traded fund's shares connected with those notes end above the $220.2428 knock-out price.

Otherwise, the payout will be par plus double the share price is above the initial share price, subject to a maximum payout of par plus 73% or par minus the share price return if the final share price is below the initial share price.

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