Deutsche Bank's autocallables tied to Topix: too much risk for limited returns, sources say

By Emma Trincal

New York, July 7 - Deutsche Bank AG, London Branch's 0% autocallable return enhanced notes due July 25, 2012 linked to the Topix index are designed for investors who expect only moderate gains in the Japanese equity market over the next year, sources said.

Otherwise, for the very bullish and even slightly bearish investors, the notes present too much risk for limited returns, they said.

"You'd have to be only moderately bullish to buy these notes," said Steve Doucette, financial adviser at Proctor Financial.

The notes will be automatically called at a price of at least 107.24 if the index closes at or above 104% of its initial level on Oct. 20, Jan. 20, 2012 or April 20, 2012, according to an FWP filing with the Securities and Exchange Commission.

If the notes are not called and the final index level is greater than the initial index level, the payout at maturity will be par plus 1.81 times the index return, subject to a maximum return of at least 7.24%. Investors will be exposed to any index decline.

"You need a 4% increase to get to the 7%, then you're capped," said Doucette. "What happens if the index is up 8% or more?"

Growth required

Unlike other types of autocallable structures in which the index may simply have to be equal to its initial level in order for the notes to get called and investors to pocket the premium, this note requires the index to grow above its initial level by at least 4% in order for investors to achieve the benefits of the call, according to the prospectus.

Doucette noted that it makes the odds of a call less likely.

It is only at maturity that investors can expect to earn a return in the event that the index's return is less than 4%, as long as the benchmark performance is positive.

But even in this case, investors need to reach the 4% call level in order to achieve the maximum return equal to the 7.24% call premium, according to the prospectus.

Downside risk

Doucette said that he was not comfortable with having the same downside exposure as the index.

"You're making a bet on equity, but you're limiting your upside. It's a full downside exposure for a potential 7% coupon," he said.

"If there was a little bit of a protection, even a 10% or 20% protection, it might make a difference."

Doucette has invested in autocallable notes before.

"We've had some luck with an autocallable before. It was a three-year at 12%, and we got called after one year," he said.

Issuer's creditworthiness

Doucette said that his concern with the notes was related to the structure, not the issuer.

"We've done quite a bit of business with Deutsche Bank before," he said.

"They have exposure to the Greek debt, but I don't think it's going to put a huge dent in their balance sheet. They're still among the top six CDS spreads for the major investment banks."

Low cap

Matt Medeiros, president and chief executive officer of the Institute for Wealth Management, who is bullish on the Japanese equity market, said that he would not consider the notes given the limited upside.

Investors may not achieve a greater return than 7.24% a year "regardless of the appreciation of the index, which may be significant," the prospectus warned in its risk section.

"We think the potential for growth in Japan is very good for the next 12 months. I like Japanese stocks and the Japanese's capacity to rebuild," he said.

"My return expectation for one year would be more optimistic than 7%."

The Topix index is down 7.5% year to date and up only 1.4% for the past 12 months. But Medeiros said that does not stop him from being bullish on the index.

"Performance for the past 12 months is not indicative of the next 12 months," he said.

And yet, as with any equity investment, there is risk, Medeiros noted, adding that the compensation should be commensurate with the risk.

"Having such a low cap for taking the equity risk doesn't make a lot of sense to me," he said.

The notes (Cusip: 2515A18T1) were expected to price Thursday and will settle on Tuesday.

JPMorgan Chase Bank, NA and J.P. Morgan Securities LLC are the agents.

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