Structured Finance
Simba II
Floating-Rate Zero-Coupon Convertible Puttable Callable Notes

Prof. Ian H. Giddy, New York University

Examine the deal described below. What's going on?

NEW YORK, March 7, 2002 - Merrill Lynch & Co., Inc. (NYSE: MER) today announced that it has entered into a purchase agreement for the sale of $2 billion original principal amount of Liquid Yield Option Notes, or LYONs, due 2032. The transaction was increased in size due to strong investor demand.

The LYONs are zero coupon floating rate senior notes convertible into Merrill Lynch common stock, and are being offered under Merrill Lynch's shelf registration statement. The LYONs offering is being sole managed by Merrill Lynch's broker-dealer subsidiary, Merrill Lynch, Pierce, Fenner & Smith Incorporated. 

Merrill Lynch will use the proceeds of the offering for general corporate purposes. 

The LYONs are being offered at an initial offering price of $1,000 per security and have a yield of 3-month LIBOR less 2.00%, reset quarterly. Such yield will never be less than 0%. The issue price represents an initial conversion price of $72.35 per share. 

The underwriter will also have a 30-day option to purchase up to an additional $300 million original principal amount of the LYONs to cover over-allotments. 

Each $1,000 original principal amount of LYONs will be convertible into 13.8213 shares of Merrill Lynch common stock upon the occurrence of any of the following events: (i) if the closing price of Merrill Lynch's shares of common stock on the New York Stock Exchange exceeds specified levels; (ii) if the credit rating of the LYONs is reduced below specified levels; (iii) if Merrill Lynch calls the LYONs for redemption; or (iv) if Merrill Lynch is a party to certain mergers or consolidations. 

Merrill Lynch may redeem the LYONs for cash on or after March 13th, 2007 at their then principal amount. Merrill Lynch may be required to repurchase the LYONs at their then principal amount, at the option of the holders, on March 13th of 2005, 2007, 2012, 2017, 2022 and 2027. In such event, Merrill Lynch may choose to pay the purchase price for such repurchases in cash or shares of Merrill Lynch common stock. 

Source: Merrill Lynch website

Date: May 9, 2002
Price: $43.34

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