Lehman plans notes linked to global index basket; Barclays plans notes linked to FTSE 100

By Sheri Kasprzak

New York, May 11 - The FTSE 100 index has gained a lot of attention over the past few weeks and is included again in two upcoming offerings. In one the index is featured as part of a basket of indexes and in another it stands alone.

"In the past, the FTSE [100] has generally been part of a basket, so I do think it's very telling that it is now standing alone," said one market source. "The performance has been improving steadily. That is undoubtedly a factor."

Lehman's note basket

On Friday, the index appeared as part of a basket of indexes linked to notes planned by Lehman Brothers Holdings Inc. The basket also includes the Dow Jones Euro Stoxx 50 index, the Nikkei 225 index and the S&P 500/ASX 200 index.

The FTSE 100 index carries a weight of 29% in the basket. The Dow Jones Euro Stoxx 50 has a 39% weight, the Nikkei a 22% weight and the S&P 500/ASX 200 a 10% weight.

The percentage weight that the FTSE 100 carries in this basket is interesting because the weight it has carried in baskets, even from a few months ago, was substantially lower.

For example, in March, Credit Suisse (USA), Inc. priced zero-coupon Buffered Accelerated Return Equity Securities linked to a basket that included the S&P 500, the Russell 2000, the Dow Jones Euro Stoxx 50, the Nikkei 225, the S&P 500/ASX 200 indexes, as well as the FTSE 100. The FTSE 100 carried just 5% weight in that basket.

In January, the FTSE 100 was part of a $2.699 million offering of zero-coupon ProNotes, also priced by Credit Suisse. The index carried 18.75% weight in the basket, which also included the Dow Jones Euro Stoxx 50 index, the S&P 500 index, the Nikkei 225 index and the S&P 500/ASX 200 index.

Still, in March, The Goldman Sachs Group, Inc. priced $5 million in enhanced participation notes linked to the FTSE, the Dow Jones Euro Stoxx 50, the Topix and the Swiss Market indexes. In that offering, the FTSE 100 carried 29% weight.

"The weightings do indicate strength, or at least perceived strength," said one market source. "At any rate, past performance and expected performance are big indicators."

Terms of the Lehman note

The planned Lehman note pays par plus $1,000 times the basket return times the participation rate, expected to be 120%, if the final basket level is equal to or greater than the initial basket level.

If the basket level is below the initial level but more than the 20% protection level, investors receive par at maturity.

If the basket level falls below the 20% protection level, investors will lose 1% for every 1% drop beyond 20%.

Index performance

The FTSE 100, an index that includes the crème de la crème of British companies, gained 2.4% in March, even after plummeting to 6,000 in mid-March. For the first three months of the year, the index gained 2%. On Friday, the index climbed 41.60 to end at 6,565.70.

Barclays' notes

Also related to the FTSE 100, Barclays Bank plc said it plans to price buffered return enhanced notes linked solely to the index later this month.

The 16-month notes pay par times twice the basket return up to a 15% return if the final index level is greater than the initial level.

The principal is protected up to a 15% drop in the index. Investors will lose 1.1111% for every 1% drop in the index beyond 15%.

The Barclays notes aren't the only notes recently linked solely to the FTSE 100. Earlier this month, Merrill Lynch & Co. announced plans to price zero-coupon buffered return enhanced notes linked to the index through J.P. Morgan Securities Inc.

Those 15-month notes pay par plus double any gain on the index, subject to a 14.3% maximum return.

The Merrill notes are protected up to a 10% drop in the index. Anything beyond a 10% drop and investors will lose 1.1111% for every 1% drop beyond 10%.

Stock performance

Looking to the performance of the top 10 stocks that comprise the index, almost all of the stocks saw an increase in April.

BP's stock ranged between 547.50p and 576.50p for the month of April. HSBC Holdings' stock traded between 886.50p and 928p for the month. GlaxoSmithKline's stock traded between 1,338p and 1,481p during April and Vodafone Group's stock traded between 136.60p and 143.50p. Royal Bank of Scotland's stock traded between 1,980p and 2,071p for April and Royal Dutch Shell's stock between 1,675p and 1,750p. Barclays' stock ranged between 723p and 756p for the month and AstraZeneca's stock ranged between 2,718p and 2,953p. Anglo American plc's stock traded between 2,672p and 2,780p.

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