Lehman Brothers Holdings Inc.. betting that investors expect regional bank stocks to appreciate in value. is issuing a hybrid equity-linked derivative whose payout is tied to an index of 20 regionals.
The new issue of "suns" -- Lehman's acronym for stock upside note securities is the investment firm's first linked to a bank stock index.
Investors in the securities can position themselves to profit from the consolidation in the industry, while avoiding the risk of losses in the event of a slide in bank stock prices.
"It's a good deal for a mutual, fund that wants to take a positionr in regional bank stocks without the downside of owning individual stocks," said Heinz Binggeli, managing director of Emcor, a New York risk management consultancy. "It's a convenient way to get a diversified position in bank stocks."
The 20 stocks in the index at one time or another mentioned as likely takeover targets.
According to the prospectus, the largest banks in the basket include: First Chicago Corp., with a market capitalization of $4.4 billion, Barnett Banks Inc. with $4.1 billion, CoreStates Financial Corp. with $3.6 billion, U.S. Bancorp with $2.4 billion, Bancorp Hawaii with $1.2 billion, Baybanks Inc. with $1.1 billion. Mercantile Bancorp. with $1.5 billion, and UJB Financial Corp. with $1.4 billion.
The basket also includes Michigan National Corp, which last week announced it would buy back $200 million of its stock, making it a more expensive takeover target.
Lehman's Suns are equitylinked notes that pay no coupon, but deliver a payment at maturity
in this case two years based on the performance of the 20 bank stocks over that period.
The company plans to issue 1.5 million Suns at $25 each. The derivative will be listed on the American Stock Exchange.
Investors in the Suns won't get the full value in the basket of stocks because the payout will be set at pricing.
However, by giving up some of the profit. investors get a 5% floor guarantee. If the value of the portfolio declines by 5% or more at maturity, investors will still get 95% of their investment back.
"It's not really a futures position." said Mr. Binggeli, "it's an options position. Investors are taking a view on how the stocks will perform.
Another advantage of the Suns is that the instrument's performance is linked to all the stocks in the basket.
If one of the bank's stock appreciates 20% and another loses 20%, they would cancel each other out and the investor would lose nothing.
"It's a typical structured note," Mr. Binggeli said.
This is Lehman Brothers' second Suns issue this year.
The first was issued in April and was tied to an index of 24 global telecommunications stocks.
Options on another basket of bank stocks. based an index developed by Keefe. Bruyette & Woods Inc.. is traded on the Philadelphia Stock Exchange.