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Apple Set to Pass Libor as Second Most Popular Note Underlying

Sales of U.S. structured notes tied to the share price of Apple Inc. (AAPL) climbed to $1.47 billion this year, on the verge of overtaking the London interbank offered rate as the second most commonly linked underlying.

Investors bought $357.2 million of notes in 104 offerings tied to the world’s most valuable company in October, the biggest sales month since January 2010, according to data compiled by Bloomberg. That compares with $19 million in two deals linked to Libor, or the rate that banks say they can borrow in dollars from each other, which totals $1.473 billion for the year, or about $2 million more.

Structured notes tied to Apple promise more appealing returns with Libor close to a 15-month low as the Federal Reserve holds benchmarks rates within a historically low range of zero to 0.25 percent. While this year’s best-selling note linked to the Cupertino, California-based company risks losses if the share price plummets, the annual potential yield is 12 percentage points more than for the largest Libor-tied security.

For products known as range accruals, “there’s not a lot of value in adding that Libor component,” said Deryk Rhodes, vice president of structured product trading at Incapital LLC in Boca Raton, Florida. This kind of note pays a return based on whether one or two measures, such as Libor, are within certain limits.

Rising Shares

Most structured notes tied to Apple this year are reverse convertibles or so-called auto-callables, securities that typically include a buffer against losses before losing as much as their entire value if the stock price plunges, Bloomberg data show. Apple shares have risen 44 percent to $581.61 since the beginning of the year.

JPMorgan Chase & Co. (JPM) issued on Aug. 30 the most popular note tied to Apple, $65.5 million of one-year auto-callables. The note pays 13.56 percent a year as long as the share price doesn’t fall below 80 percent of its initial value, with all capital at risk, according to a prospectus filed with the Securities and Exchange Commission. The bank will automatically redeem the security on any quarterly date when the stock price is above that starting level.

Royal Bank of Canada had the year’s biggest offering linked to Libor. The $200 million of three-year notes issued on Aug. 22 pay 0.935 percent for the first year, according to a prospectus filed with the SEC. The securities then yield 0.43 percent more than the three-month dollar Libor rate, which is 0.3118 percent today. That return would be less than half of the U.S. inflation rate of 2 percent.

The most popular underlying in the U.S. market is the Standard & Poor’s 500 Index, accounting for $8.84 billion of issuance.

Banks create structured notes by packaging debt with derivatives to offer customized bets to retail investors while earning fees and raising money. Derivatives are contracts whose value is derived from stocks, bonds, commodities and currencies, or events such as changes in interest rates or the weather.

Bloomberg began collecting comprehensive data on U.S. SEC- registered securities in 2010.

To contact the reporter on this story: Kevin Dugan in New York at kdugan4@bloomberg.net

To contact the editor responsible for this story: Alan Goldstein at agoldstein5@bloomberg.net

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