Lehman prices $15 million in gold, silver range notes, $1 million reverse convertibles linked to oil

By Sheri Kasprzak

New York, Nov. 15 - Commodities like gold, silver and crude oil are heating up in popularity this week and one market source said he is not surprised.

"There's a lot of talk about those [commodities] in particular," he said.

"Silver and gold have always been reasonably popular, gold especially.

"It's interesting to see something linked just to gold and silver, which to me seems like an indicator that those prices may be about to move back up again."

The market source noted that some of these offerings are being priced as speculation is growing about an upward move in the underlying assets - although it should be observed that some of the structures need prices to not moved too far from current levels for investors to benefit.

"Investors start hearing talk on something, say, gold prices," he said. "So they want something linked to gold prices because they feel gold is going to be rising soon. That's how it works."

Lehman's offering

On Tuesday, Lehman Brothers Holdings Inc. negotiated a $15 million issue of 0% Double Conditional Range Notes linked to the prices of gold and silver.

The four-month notes pay 103.15% of par if gold and silver prices trade within a reference range during the term of the notes. Payout at maturity will be par if either commodity trades outside of the reference ranges.

Other gold-linked notes

Gold has been linked to more than one upcoming note offering.

On Wednesday, structured products newcomer KfW, a German government-linked bank, said it plans to price three-year notes linked to a basket of commodities that includes gold. The basket also includes West Texas Intermediate crude oil, zinc, aluminum, copper, nickel and lead.

Citigroup Funding Inc. has also announced plans to price 0% commodity-linked one-year notes based on the price of gold.

Even though most of the gold-linked notes announced recently are depending upon gains in the commodity, UBS AG is negotiating 0% one-year appearing reverse convertible notes linked to the price of gold.

Lehman to price crude oil notes

Elsewhere in commodities news Wednesday, Lehman priced its previously announced offering of single-barrier synthetic reverse convertibles linked to light sweet crude oil for $1 million.

As previously announced, the notes pay par plus a 9.05% return unless oil falls below 75% of the initial price during the life of the notes. If oil prices fall below that 75% barrier, investors will share in any losses.

A market source remarked Tuesday that crude oil is now a good candidate for reverse convertibles because prices have reached a range between $58 and $61 per barrel.

On Wednesday, oil prices gained 48 cents to end the day at $58.76 per barrel.

Principal-protected oil notes

Oil has also been popular among principal-protected note offerings, along with other commodities, this past week.

JPMorgan Chase & Co. priced $1.9 million in 0% principal-protected notes linked to crude oil, aluminum, copper, nickel and zinc earlier this week and Royal Bank of Canada announced its plans to price 0% principal-protected notes linked to crude oil, copper, nickel and zinc.

One market source contacted Wednesday said he couldn't comment on his investment bank's principal-protected notes specifically, but did say those types of notes are popular for investors looking for a bit of security.

"If the bottom falls out and the price of something completely just drops through the floor, you're still protected," he noted. "You're not going to get that kind of protection if you go with something like a mutual fund. You're just going to lose everything."

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