Lehman prices $144.33 million commodity-linked notes

By LLuvia Mares and Sheri Kasprzak

New York, Oct. 30 - Lehman Brothers Holdings Inc. continued to surprise market specialists Tuesday with the pricing of a $144.33 million offering of zero-coupon buffered return enhanced notes linked to a basket of 20 sub-indexes of the Lehman Brothers Commodity Index - Pure Beta Excess Return.

"Lehman, given its emphasis on third parties, always continues to surprise with good-sized notionals in some of the more innovative trades, which is always a good thing," said Keith Styrcula, chairman of the Structured Products Association.

"I like the 20% buffer and the par plus 181% of basket gain is great; the economics are very attractive also in their commodity index."

Elsewhere in structured products, JPMorgan Chase & Co. priced $1.551 million in reverse exchangeable notes linked to the stock of troubled rival Merrill Lynch & Co. On Tuesday, Merrill ousted its chief executive officer Stan O'Neal after the company sustained its greatest single-quarter loss in its history. The company has been plagued with write-downs and an analyst Tuesday said he expects more write-downs on complex debt instruments.

"I like that it's fairly short-term," said one market insider. "I don't think Merrill's problems are going to last forever or even over the course of a year. I think if you're interested in something like this, the short term is the place to be."

Lehman deal uses single commodity sub-indexes

Moving back to the Lehman notes, each sub-index comprising the four-year notes focuses on one commodity.

The LBCI Pure Beta Natural Gas Excess Return index has a 10% weight; the LBCI Pure Beta Crude Oil Excess Return index has a 5% weight; the LBCI Pure Beta Brent Excess Return index has a 5% weight; the LBCI Pure Beta Gasoline Excess Return index has a 3% weight; the LBCI Pure Beta Live Cattle Excess Return index has a 2% weight; the LBCI Pure Beta Lean Hogs Excess Return has a 2% weight; the LBCI Pure Beta Wheat Excess Return index has a 4% weight; the LBCI Pure Beta Corn Excess Return index has a 6% weight; the LBCI Pure Beat Soybeans Excess Return has a 7% weight; and the LBCI Pure Beat Soybean Oil Excess Return has a 3% weight.

In addition, the LBCI Pure Beta Aluminum Excess Return has a 7.5% weight; the LBCI Pure Beta Copper Excess Return has a 7.5% weight; the LBCI Pure Beta Zinc Excess Return has a 4% weight; the LBCI Pure Beta Nickel Excess Return has a 6% weight; the LBCI Pure Beta Gold Excess Return has a 9.5% weight; the LBCI Pure Beta Silver Excess Return has a 2.5% weight; the LBCI Pure Beta Sugar Excess Return has a 4% weight; the LBCI Pure Beta Cotton Excess Return has a 4% weight and the LBCI Pure Beta Coffee Excess Return has a 4% weight.

Terms of Lehman notes

The four-year Lehman notes linked to the sub-indexes of the Lehman Brothers Commodity Index - Pure Beta Excess Return pay par plus 181% of any gain on the basket of indexes, assuming the final level is at least the initial level at maturity.

If the basket of indexes declines by up to 20%, investors receive par but if the basket declines by more than 20%, investors will lose 1% for every 1% the basket declines beyond 20%.

"There is a story that needs to be told to investors, obviously, like what the difference is with the Pure Beta Excess Return amount," said Styrcula.

"It just goes to show that with some innovative commodity type structured products, there is still very compelling economics through the upside and downside protection. You can construct an index for the optimal tradability and optimal exposure to the investors; sometimes there is the same risk to the established indexes. So a product of the Dow Jones - AIG Commodity indexes would just be another product on a very liquid index but here Lehman is setting it up to customize something to get maximum exposure for investors."

Terms of JPMorgan's Merrill-linked notes

JPMorgan's six-month notes linked to Merrill Lynch have a 12% annualized coupon and pay par at maturity unless the stock falls by more than 20% of the initial share price, $66.09.

Should that happen, the investors will receive, at maturity, a number of Merrill shares equal to $1,000 divided by the initial share price.

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