Lehman, Barclays price notes commodities notes as credit landscape forces investors to seek yield

By Sheri Kasprzak

New York, Oct. 17 - Both Lehman Brothers Holdings, Inc. and Barclays Bank plc had offerings out Wednesday linked to commodities in some way, a move that should become more and more common as the credit landscape in the U.S. continues to deteriorate, market insiders speculate.

"Investors are out for yield," said one market source. "They can get it through commodities, especially since stocks have been down. If you can't make money from the equity markets, you seek out commodities."

Another market insider agreed.

"Commodities become more common [as an underlier] when you have a crisis, much like the credit crisis we're having now," said this New York-based market source. "It's highly probable that you'll see more commodities over the next several months."

Commodities-linked structured products were featured as a topic at the Structured Products Association's Third Annual Summit held in New York Monday, Tuesday and Wednesday. Panelists there agreed that commodities are a way to make money even when other portions of the market are down.

Jeff Stazis of Morningstar even echoed what market sources were saying Wednesday about commodities.

"When everything else is going down, commodities tend to go up," Strazis said at the summit.

Lehman's commodities notes

Lehman priced another $145,000 in principal-protected return-enhanced notes linked to 10 commodities. The latest sale brings to $3.161 million the notes sold so far.

The notes are linked to equal weights of light sweet crude oil, No. 2 fuel heating oil, grade A copper, primary nickel, special high-grade zinc; sugar No. 11, cocoa, coffee robusta, class III milk and number 2 wheat.

Assuming the final basket level is greater than the initial level, the three-year notes pay par plus the principal amount times the basket return times the upside participation rate of 130%.

The notes pay par otherwise.

Elsewhere at Lehman, the investment bank also plans to price three-year, principal-protected notes linked to equal weights of gold, high-grade aluminum and grade A copper.

The notes pay par plus the principal amount times the basket return times a 100% participation rate, assuming the basket return is greater than 0%. The exact participation rate will be determined at pricing.

If the basket return is equal to or less than 0%, the payout at maturity will be par.

Barclays plans commodities, index notes

In other commodities news, Barclays is negotiating the terms of "Beta Plus" notes linked to both commodities and commodities indexes.

The two-year notes are linked to copper, zinc, lead, gold, platinum, the S&P GSCI Wheat Index Excess Return, the S&P GSCI Corn Index Excess Return, the S&P GSCI Soybeans Index Excess Return, the S&P GSCI Sugar Index Excess Return, the S&P GSCI Cotton Index Excess Return and the S&P GSCI Coffee Index Excess Return.

Assuming the basket performance is positive, the notes pay par plus the principal amount times the basket performance plus the Beta Plus factor. The Beta Plus factor is equal to a percentage between 7.5% and 10.5%, to be determined on the basket initial valuation date.

If the basket performance declines, the investors lost 1% of their principal amount for every 1% the basket performance declines by more than the Beta Plus factor.

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