Morgan Stanley, Lehman notes appeal to investors bullish on commodities

By Sheri Kasprzak

New York, March 28 - An offering of outperformance notes linked to the S&P GSCI Energy Index - Excess Return that Morgan Stanley plans to price may appeal to investors who believe commodities will outperform the S&P 500, according to Suzi Hampson with Future Value Consultants.

"I guess the people, investors, they're appealing to have the belief that commodities will do better [than the S&P 500]," said Hampson in an interview Friday.

"I think they get a higher gearing from the difference and so rather than appealing to people who think commodities will improve, it also appeals to people who think commodities will improve as U.S. equities decrease."

Although Hampson said the notes could have been linked to just about any commodity or commodity index, the notes linked to the energy index may appeal to some investors because of increasing oil prices.

"They may appeal to investors who think that oil will continue to go up, so maybe it appeals to investors that way," she said.

"Using the oil index, maybe they're covering themselves."

The zero-coupon Performance Leveraged Upside Securities, which have a 14-month term, pay par plus triple the amount by which the index return exceeds the S&P 500 return. Investors will lose 1% for each 1% that the S&P 500 return exceeds the energy index.

The payout on the notes will be capped at between $12.40 and $12.80 for each $10 in principal. The exact cap will be determined at pricing.

The index tracks West Texas intermediate crude oil, Brent crude oil, gasoline, heating oil, gasoil and natural gas.

Lehman's commodity-linked notes

Commodity-linked notes abounded this week with Lehman Brothers Holdings, Inc. announcing plans to price zero-coupon buffered return enhanced notes with a four-year term.

The notes are linked to a basket that includes light sweet crude oil, Henry Hub natural gas, RBOB gasoline, No. 2 fuel heating oil, special high-grade zinc, standard lead, gold, high-grade primary aluminum and grade A copper, as well as the S&P GSCI Livestock Index Excess Return and the S&P GSCI Agriculture Index Excess Return.

The structure of this basket is interesting, Hampson said, because it is well spread over several commodity classes.

"There are non-precious metals, precious metals, agriculture," she noted.

"So it does seem to be fairly spread, whereas the first [Morgan Stanley notes] is more specific. This is more general. This would be for an investor who thinks commodities as a whole asset class will increase, if they didn't have a particular opinion of which will increase. I think it would appeal to people who aren't too particular about what they're investing in."

Hampson noted that structures like this pop up quite frequently from Lehman.

"Quite a lot of providers seem to do that," she said.

"I guess that might be a way of investors and advisers getting the same product. Maybe an investor has done well [with something like this] and they think about doing it again."

The choice of commodities included in the baskets does change and Hampson said the issuer likely picks and chooses the particular commodities based upon what is performing well at the time.

Lehman's notes pay par plus 160% to 190% of any gain on the basket. If the basket falls by up to 20%, the payout will be par. Beyond a 20% decline, investors will lose 1% for every 1% decline.

The offering is set to price April 18.

Morgan Stanley plans other commodity notes

Elsewhere, Morgan Stanley was in headlines again, planning to price capital-protected notes linked to a variety of commodities.

The notes are linked to coal, West Texas intermediate crude oil, high-grade primary aluminum, grade A copper, the S&P GSCI Livestock Index - Excess Return, gold, platinum, corn, soybeans, soybean meal and wheat.

"It is a matter of not putting too much weight on one [commodity] if it should fall," Hampson said.

"If it is heavily weighted on one group or one specific commodity, you might also alienate investors who are interested in a particular commodity. By spreading it out, it might appeal to more than one type of investor."

The principal-protected notes have a five-year term. The notes pay par times the basket performance times the 100% participation rate, assuming the supplemental redemption amount is not less than zero.

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