Lehman's Exxon Mobil-linked notes bring index-type structure to single stock, analyst says

By Sheri Kasprzak

New York, Feb. 1 - A planned offering of accelerated growth notes linked to the stock of Exxon Mobil Corp. from Lehman Brothers Holdings Inc. is interesting, said one analyst Friday, because products like this are not often linked to an individual stock.

The one-and-a-half-year notes offer potential accelerated returns by way of a 200% market participation rate, subject to a 29% to 32% maximum return. The payout will be par is the stock falls by up to 10% and investors participate in losses beyond the buffer level of 10% below the initial strike price.

"Usually, when we see notes like this, they're linked to indices or currencies," said Suzi Hampson of Future Value Consultants, a London-based firm that analyzes derivatives products, in an interview Friday with Prospect News.

"I haven't seen one like this before, so I don't know how popular it would be. I don't know who would be interested in something like this."

Product could underperform direct holding

In a report, Hampson said the investors can receive a return capped at 29% to 32% with potential stock-linked return achieved up to a 14.5% to 16% limit.

"Any growth in the stock above this 14.5% to 16% level is not passed on to the investor, who receives the maximum product return of 129% to 132% (including principal) only," said the report.

"Thus, this product would underperform a direct holding in the stock (without any dividends) in the event of stock growth in excess of 14.5% to 16%, which is equivalent to 9.45% to 10.40% compounded stock growth p.a."

However, she pointed out that the investment provides potential enhanced returns on small to moderate market gains. The notes do not provide principal protection.

Barclays' Asian and Gulf notes

Elsewhere, Hampson said an offering of notes linked to a basket of Asian and Gulf currencies from Barclays Bank plc may not be that common, but notes linked to such currencies aren't unheard of.

"It is something I've seen before," she said in an interview.

Notes linked to these currencies, Hampson suggested, might be appealing to investors interested in oil and other related commodities.

"We haven't seen a particularly large number of these, but we have noticed a little bit," she added.

The Barclays notes are linked to a strategy that includes the Chinese yuan, the Hong Kong dollar, the Saudi Arabian riyal, the Singapore dollar and the United Arab Emirates dirham. The strategy reflects the total return, including both exchange rate movements and implied local deposit rates, of U.S. dollar investments in the reference strategy constituent currencies.

"It's an interesting strategy," one market source not connected to the offering said earlier this week.

"Investors have been looking at Middle Eastern currencies a little more, though it does seem like a fairly new thing to structured products. I don't think they're any riskier than some of the Asian currencies or the Latin American currencies. It's an interesting mix of developed and EM, so that is what makes it most interesting to me."

The notes pay a cash payment per security equal to the closing indicative value on the final valuation date.

The closing indicative value is calculated on the inception date as $50. On each subsequent calendar day through maturity or early redemption, the value will equal the closing indicative value on the immediately preceding calendar day times the daily index factor on that calendar day, minus the investor fee.

The investor fee, calculated daily, is 0.89% per year times the daily index factor. The daily index factor is equal to the closing level of the reference strategy on that business day, divided by the closing level of the reference strategy on the immediately preceding reference strategy business day.

Eksportfinans' Dogs of the Dow

In other news Friday, Eksportfinans ASA announced plans to price 25% reverse convertibles linked to the "Dogs of the Dow" stocks through Natixis Securities North America Inc.

The one-year notes pay par at maturity if the closing price of the worst-performing stock does not close below the initial share price or hit the 60% knock-in level during the life of the notes.

If that should happen, investors will receive a number of shares of the worst-performing stock equal to $1,000 divided by the initial share price.

The stocks included are Altria Group, Inc.; AT&T, Inc.; Citigroup Inc.; E.I. du Pont de Nemours and Co.; General Electric Co.; General Motors Corp.; the Home Depot, Inc.; JPMorgan Chase & Co.; Pfizer Inc.; and Verizon Communications Inc.

JPMorgan plans dual-directional notes

Finally, JPMorgan Chase & Co. said Friday it will price principal-protected dual-directional notes linked to a weighted basket of three commodities and three commodity indexes.

The two-and-a-half-year notes are linked to crude oil, aluminum, copper, the S&P GSCI Precious Metals Index Excess Return, the S&P GSCI Livestock Index Excess Return and the S&P GSCI Agriculture Index Excess Return.

The basket includes 35% weighting in oil, 15% weighting in aluminum, 15% weighting in copper, 15% weighting in precious metals, 10% weighting in livestock and 10% weighting in agriculture.

Payout at maturity will be par plus the principal amount times the basket return times the upside participation rate, which is expected to be at least 110% with the actual rate to be determined at pricing, assuming the ending basket level is greater than the starting level.

If the ending basket level is equal to or less than the starting level, the investors receive par plus the principal amount times the absolute basket return times the downside participation rate, expected to be no less than 25% or greater than 30% with the exact rate to be determined at pricing.

The notes are set to price Feb. 26.

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