ABN to sell notes linked to MasterCard; Deutsche prices commodity notes; Lehman brings BRICK notes

By LLuvia Mares

New York, Jan. 25 - A recent financial sector-based deal demonstrates how high volatility boosts income, according to one market source.

"With the credit crunch being the dominating topic the last six months, I thought it was interesting to look at a company whose whole business is credit cards," said Tim Mortimer, Future Value Consultants managing directors.

The deal he chose was ABN Amro Bank NV's planned offering of 17.9% Knock-in Reverse Exchangeable Securities due July 31, 2008 linked to the common stock of MasterCard, Inc.

"Sure enough the volatility level at this time is pretty high, generating a healthy coupon for a reverse convertible. You can't get much more credit related than Master Card, so it is interesting to see someone link their products to that and with this coupon you can get quite a juicy income.

"If you look at the probabilities as we calculated them, there is a chance, we estimate around about 80% that the barrier will be avoided and therefore the product will pay its full coupons, income and principal," he said. (The accompanying chart shows more details of Mortimer's analysis.)

"And then there is a probability of about 17% that you will lose on an annualized basis, income plus principal return, together more than 5%. Because the product is so short [half a year], if you do breach the 75% barrier then the situation wouldn't very likely then recover and avoid loss. So as you can see from the chart the two main outcomes are the best and worst ones, which are typical of a reverse convertible."

The payout at maturity will be par unless MasterCard stock falls by more than 25% during the life of the notes and the final share price is less than the initial share price, in which case the payout will be a number of MasterCard shares equal to $1,000 divided by the initial share price.

The notes will price on Jan. 28 and settle on Jan. 31.

ABN Amro Inc. is the agent.

Deutsche Bank prices $779,000 notes

Elsewhere in the market, Deutsche Bank AG, London Branch priced $779,000 of zero-coupon 100% principal-protected notes due Jan. 25, 2013 linked to the Deutsche Bank Liquid Commodity Index - Optimum Yield Excess Return.

"The Deutsche Bank commodity index [deal] is principal protected," said Mortimer. "But with the volatility being so high in just about everything, we are not seeing any principal protected anything at this moment. So I guess from that point of view alone it is an interesting product to look at."

"Commodities, with the shape of the forward curve, probably allow the pricing to work better," he said.

"Principal-protected products are not that popular in the U.S. for tax reasons and maybe because of risk capital reasons too. But when the volatility levels are as high as they have been recently, prices of call options that need to be purchased become very expensive and therefore the participation rates are very unattractive and it would be hard to sell a principal-protected note linked to something that only has a 50% participation for example."

The payout at maturity will be par plus any gain on the index. Investors will receive at least par.

Deutsche Bank Securities Inc. and Deutsche Bank Trust Co. Americas are the underwriters.

Lehman prices bull-bear FX notes linked to BRICK

In a different product, Lehman Brothers Holdings Inc. priced $865,000 of bull-bear foreign-exchange basket-linked notes due Jan. 28, 2011 linked to a basket of currencies.

"So you have a long position and short position and it is 100% upside and 60% downside, with no barrier," he said. "Because of the pricing they often put up a barrier and so if you go outside by 25% or something, then you lose your upside or downside. With this one it doesn't do that, which is better.

"With a maturity of three years, it's a decent maturity so it's logical to say that it's long enough to see how the dollar is going to shake out. In three years the dollar could have strengthened significantly or continued to show problems and who knows where the emerging markets will be by then.

"So you can take the deal that the currencies are unlikely to stand still and that something big can happen in either direction."

The basket consists of equal weights (20%) of the Brazilian real, Russian ruble, Indian rupee, Chinese yuan and Korean won, all against the U.S. dollar.

The notes allow investors to take a long position in the currencies in the basket versus the dollar, at the same time as a short position in the basket versus the dollar.

If the basket appreciates against the dollar, the payout at maturity will be par plus 100% of any gain on the basket.

If the basket depreciates versus the dollar, investors will receive par plus 60% of the absolute value of any decrease in the basket.

Lehman Brothers Inc. is the underwriter.

Goldman Sachs upsizes to $6.59 million

Also linked to currencies, AB Svensk Exportkredit priced an additional $530,000 of zero-coupon bull notes due Aug. 1, 2009 linked to a basket of Asian currencies via Goldman, Sachs & Co.

"You are taking 3% which is annualized at 2% a year, plus double the upside. So if you are bullish on those currencies paying against the dollar then you are getting half of cash returns anyway, that is a chance to get double the upside," Mortimer said. "So if you invest in cash you will only get something like 104½ for half a year."

The extra notes priced at 96.28.

With the add on, the issue size is now $6,587,000. Svensk previously priced $6,057,000 of notes at par on Jan. 11.

The basket contains equal weights of the Indonesian rupiah and the Philippine peso, each relative to the dollar.

The payout at maturity will be par plus double any gain on the basket plus a bonus of 3%.

The minimum payout will be par plus the bonus.

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