Two issuers offer commodity-linked notes; recent volatility offers value, structurer says

By Kenneth Lim

Boston, Sept. 14 - Commodity-linked products continue to draw interest from investors as they seek to diversify their portfolios into alternative assets as well as protect against inflation, a structurer said.

A number of commodity-linked products have been priced in recent weeks.

The latest was $10 million of notes due Oct. 20, 2011 issued by Deutsche Bank AG, London Branch linked to the Dow Jones - UBS Commodity Index Total Return.

Interest equals one-month Libor minus 16 basis points and is payable monthly. The securities are putable at any time subject to a minimum of $1 million principal amount and will be called if the index declines by 15% or more.

The payout upon redemption or at maturity will be par plus triple the sum of the index return minus the TBill return minus the adjustment factor. The TBill return will be the sum of the 91-day weekly auction high rates for U.S. Treasury bills for each day during the life of the securities. The adjustment factor will be the greater of 0.25% per year and a flat rate of 0.01%.

Wells Fargo Bank, NA plans to price a longer-term product through certificates of deposit due Sept. 30, 2015 linked to a basket of 10 commodities, including three commodity indexes.

The equally weighted basket includes the S&P GSCI Crude Oil Index Excess Return, gasoline, sugar, soybeans, the S&P GSCI Wheat Index Excess Return, the S&P GSCI Livestock Index Excess Return, zinc, gold, platinum and nickel.

In September of each year, the CDs will pay a coupon equal to the average of the basket commodities' returns, with a floor of zero. The return of each basket commodity will be subject to a floor of negative 20% and a cap of 10% to 12%, with the exact cap to be set at pricing.

The payout at maturity will be par.

Consistent demand

Interest in commodity products has been fairly constant, the structurer said.

"You do get a bit of peaks and troughs, but in general commodities and other alternative asset classes have a bit of a natural niche in structured products," the structurer said.

Structured products linked to commodities are a relatively convenient and low-cost platform through which investors, particularly retail investors, can access the commodities market. That has made them popular among financial advisers, the structurer explained.

"It's a very easy way to gain exposure to commodities without having to actually buy commodities or commodity futures," the structurer said.

Commodities tend to be negatively correlated to more traditional asset classes like equities, and so they can potentially lower the volatility of a comprehensive portfolio, the structurer said.

"Commodities are kind of a proxy for inflation because commodity prices rise when inflation increases," the structurer said. "So you're in effect hedging against inflation."

Recent volatility

Commodities can be quite volatile as an asset class, and recent concerns about the U.S. and global economies have increased the uncertainty among commodities investors. But that has also created the potential for value, the structurer said.

"If you're bullish about commodities, you would see potential bargains in any dips," the structurer said. "You can buy a bullish product linked to commodities to manifest that view."

The market over the past two weeks has also turned a little more confident about the prospects for inflation, which could also be positive for commodities, the structurer added. Investor inquiries have not waned.

"We have seen some interest in commodity products, and I think it's a market where structured products can really create value for investors," the structurer said.

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.