Merrill Investors, Brokers Roaring Over Company's Early LYON Call

• Published in: Wall Street journal. Europe
• Main Author: By John R. Dorfman and William Power
• Format: Newspaper Article
• Language: English
• Published: Brussels Dow Jones & Company Inc 07.10.1991
• Edition: Europe
• Subjects: Interest rates; Investments; Municipal bonds; Stock brokers
• ISSN: 0921-9986

The brokerage firm spent Friday fending off a flurry of protests over its decision to force investors to cash out early from one of Merrill's popular LYON securities. The squawking came not only from investors, but also from Merrill's own brokers, who saw Merrill as shooting itself in the foot with a shortsighted action that could hurt future demand for LYONs. The LYON, or Liquid Yield Option Note, is Merrill's name for a special hybrid security with features of both bonds and stocks. It's a zero-coupon bond -- a bond paying no current interest that is bought at a steep discount from its eventual face value. And it's convertible: A holder can exchange a LYON for a specified number of common shares of the issuing company -- in this case, Merrill itself. On Thursday, Merrill said it will "call" back from investors some $618 million of LYONs it issued in 1986. Instead of getting $1,000 per LYON in 2006, investors will get $335.66 per LYON now. By calling the bonds, which carried an implicit 8% interest rate, Merrill can save money, the same way a homeowner with a high-interest mortgage can save by refinancing. Bondholders hate calls, which leave them with cash to reinvest just when when interest rates are down. Some investors complained they had been led to believe a call was unlikely.