Lehman Brothers Inc has been monkeying about with Micron Technology Inc’s shares, and the Boise, Idaho memory chip maker is not at all amused, although there is not a thing it can do about it. What Lehman has done is to create an exotic derivative which it calls a YEELDS for Yield-Enhanced Equity-Linked Debt Security, for which the equity element is the volatile Micron share price. The deal was reportedly aggressively marketed and was expanded by 36% to meet demand. The Micron-linked instruments are three-year notes issued by Lehman, and were priced at $17.56, or 50% of the closing price of Micron’s shares on Tuesday last week. They carry a juicy 9.125% annual coupon, but the downside is that investors will lose much of their capital if it turns out that in three years’ time we are at the nadir of the memory chip cycle and Micron shares are trading at only four or five bucks, because you get back half the then current Micron share price. If Micron shares rise more than 50%, Lehman is in the money because the pay-back is capped at $26.34, 150% of the original cost. Lehman’s exposure appears to be substantial because the 9.125% coupon is real money, and Micron shares have quadrupled in price since early 1992 – and could just as easily do the reverse over the next three years. Lehman sold a total of 1.7m Micron YEELDS making the issue equivalent in value to 850,000 Micron shares, about 2% of the equity. Cautious investors wouldn’t touch the things with a barge pole, but the only real downside for Micron is if people start holding the company responsible for the performance of the paper it did not issue. It is also possible that people might sell Micron shares and buy the YEELDS, but there are so few of the latter out that the effect would be minimal.
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