Investors warm up to commodities, analyst says; Lehman plans three metals-linked notes

By Sheri Kasprzak

New York, June 22 - The structured products marketplace is opening up to more commodities offerings, according to Tim Mortimer, managing director of Future Value Consultants, a London-based company that analyzes derivatives products.

"Commodities have been more popular in the [United Kingdom] and I think in Europe as well in the last year or so," said Mortimer Friday in an interview. "It's probably due to strong rises in most commodities markets."

Mortimer said in all likelihood, most of the increases in the broad commodities sector have already occurred.

"There has been an increased visibility and acceptance of commodities," he noted. "People are more open to them than they would have been two years ago."

Mortimer also noted that the commodities market may be an alternative for investors who are overweight in the equities market.

Oil diversifies baskets

Even though in the U.S. market, most commodities offerings have been in the form of metals baskets, Mortimer said he has seen deals in the U.K. that include single metals like aluminum, copper, zinc, lead and nickel, as well as crude oil and even gasoline.

Offerings with those commodities included in a basket have been seen in the U.S. market recently as well.

Mortimer said oil is likely a way to diversify the basket, noting that oil and metals value quite differently.

Lehman's offerings

Moving to specific metals offerings announced recently, Lehman Brothers Holdings Inc. is negotiating 100% principal protected notes linked to a basket that includes copper and zinc, as well as three-year principal-protected notes linked to a base metals basket that includes copper, zinc, aluminum and nickel and three-year non-principal protected notes that include the same metals.

The principal-protected notes linked to copper and zinc pay par plus any return on the basket times a participation rate expected to be 125%, assuming the basket return is positive. If the basket return is negative, investors receive par at maturity.

The principal-protected bonus notes linked to copper, zinc, aluminum and nickel pay par plus any positive return on the basket if the basket return is greater than 30%. Investors will receive par plus 30% if the basket return is better than a loss of 8.00% but less than or equal to 30%. Investors will receive par if the basket loses 8.00% or more.

The non-principal protected offering of basket metals basket bonus notes pay par plus the basket return if the basket gains more than 50%. If the return is better than a loss of 25% and less than or equal to 50%, the investors receive par plus 50%. The payout will be par plus the basket return plus 25% if the basket loses 25% or more.

Analysis of the offerings

Mortimer noted that the difference between the principal-protected offering and the non-principal protected deal is that the non-principal protected notes have a wider band.

"On the upside, it doesn't really give as much help because you can go down to -25% and still get a return," Mortimer said. "On the other [deal], you can go down to -8.00%. A lot of commodities' forward curve actually goes down so you can lock in forward prices at a lower level today."

In the U.K. market, Mortimer said there tends to be a high participation level in capital-protected offerings or offerings with a modest amount of downside risk with a leverage of up to 150% or higher.

Metals performance

Looking to the four metals included in the recently announced Lehman offerings, copper has been trading this week around the $3.35 to $3.40 per pound level. Around the same time in May, copper was trading just about the $3.50 per pound level but dropped around May 25 to the $3.20 per pound level.

Aluminum has been on a steady decline since late May. In late June, aluminum has been trading in the $1.19 per pound range. On May 22, the metal was trading around $1.28 per pound.

Nickel has also been on a downward spiral since late May. Nickel has been trading around the $17.50 per pound range. On May 22, nickel ended at just above $24.00 per pound.

Zinc has been through a lot of ups and downs over the past month. Zinc was trading at around $17.00 per pound on May 22 and is now trading around $16.00 per pound.

© 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.