Merrill prices $13.75 million in bear market notes linked to housing index

By Sheri Kasprzak

New York, July 5 - After the market cranked back up on Thursday following the July 4 holiday, Merrill Lynch & Co. Inc. led activity with the pricing of a $13.75 million offering of Accelerated Return Bear Market notes linked to the PHLX Housing Sector index.

"The term is reasonably long - at 14 months, it's clearly not a short-term note - which tells me that there is some expectation that the housing market is either going to get worse or it's not going to get any better," said one market source.

The market source, whose own investment bank has linked notes to the PHLX Housing Sector index before, said the index had made some improvements during the first few months of 2007 but has declined substantially since May.

At the beginning of February, the index was trading around 255. The starting index level for Merrill's latest PHLX notes is 213.92, the lowest level since last November. Over the month of June, the index has seen a substantial slide after trading around 235 in early June.

Terms of the notes

The $13.75 million Merrill notes pay triple the absolute value of any decrease on the index, capped at 36.1%. If the index gains up to 10%, the investors will receive par but will lose proportionally for gains exceeding 10%.

Similar deals

The $13.75 million in notes is reasonably small compared to some recent offerings of PHLX Housing-linked notes.

In April, Merrill priced $95.7 million of the zero-coupon notes with a one-year term. Those notes also pay triple the absolute value of any decrease on the index, capped at $13.00 per $10.00 note. They also have a 10% buffer.

The investment bank priced $36 million in the Accelerated Return Bear Market notes linked to the PHLX index in early June with substantially the same terms.

In April, Morgan Stanley priced $15.2 million in zero-coupon protected absolute return barrier notes linked to the index. Under the terms of the notes, investors will receive par of $10.00 plus the absolute value of the index return, capped at 25%, assuming the index remains within a range. The lower boundary of the index range is 7% of the initial level and the upper boundary is 125% of the initial level.

Investors will receive at least par at maturity.

Merrill's other bear market notes

In other news at Merrill, the investment bank priced $167.7 million in zero-coupon Accelerated Return Bear Market notes linked to the Dow Jones Industrial Average index.

The 14-month notes pay par plus five times the value of any decrease in the index. The return is capped at $12.00 per $10.00 unit. There is a 10% buffer and if the buffer is not breached, the investors can still receive par at maturity. The investors will lose 1% for every 1% the index drops below 10%.

Dow's performance

On Thursday, the Dow closed down 11.46 to end at 13,565.84.

A month prior, on June 5, the index closed at 13,595.46 and a month before that, the index closed at 13,264.62.

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