Commodities offerings abound from Lehman; RBC to price Canadian dollar-linked notes

By Sheri Kasprzak

New York, July 17 - Lehman Brothers Holdings Inc. announced the impending pricing of several commodities-linked offerings recently.

The investment bank plans to price principal-protected enhanced participation notes linked to a basket of 10 commodities, income notes linked to the same basket of 10 commodities and principal-protected notes linked to copper and zinc.

"There's every indication that there is still a healthy appetite for commodities," said one market insider reached Tuesday. "Metals seem to be the most popular but a lot of the things get linked along with them. It's a good way to diversify."

In fact, the basket of 10 commodities includes equal weights of Brent crude oil, No. 2 heating oil, grade A copper, special high-grade zinc, primary nickel, gold, No. 11 world sugar, coffee robusta, class III milk and lean hogs.

Another market source said this particular mix of commodities is interesting.

"It's not just metals, not just liquid commodities," he said. "Ag is obviously something investors are looking at too."

Leveraged upside or income

The three-year enhanced participation notes linked to the basket of 10 commodities pay par plus any basket return times and upside participation rate expected to be between 110% and 140%. The exact participation rate will be determined at pricing.

The three-year income notes linked to the same basket pay an annual interest payment of between 8.5% and 9.5% if the index basket gains on each annual valuation date. If the basket is equal to or less than zero, investors will receive par.

The two-year notes linked to equal weights of grade A copper and special high-grade zinc, pay par at maturity plus any return on the basket times a participation rate expected to be between 175% and 225%. The participation rate will be determined at pricing.

If the basket drops by 20% or less, the investors will receive par at maturity and the investors will be fully exposed to any decline beyond 20%.

The notes linked to the two commodities are expected to price July 26.

Crude oil prices up

The price of crude oil has jumped substantially over the past three months. On Monday, oil prices fell by 24 cents to end at $77.33 per barrel. On June 29, oil was trading at $71.35 per barrel and on May 31, oil closed at $68.20 per barrel. On April 30, prices ended at $67.65 per barrel.

Copper prices ended at $7,967 per tonne on Monday. On June 29, copper was trading at $7,650 per tonne. Copper was trading at about the same level in late May.

Zinc prices closed at $3,545 per tonne Monday and on June 29, zinc closed at $3,300 per tonne. On May 31, zinc closed at $3,690 per tonne and on April 30, zinc closed just under $3,700 per tonne.

Nickel prices ended at $31,905 per tonne and on June 29, prices ended at $36,000 per tonne. Prices closed at $50,900 per tonne on May 31.

RBC plans Canadian-dollar notes

In other structured products news, Royal Bank of Canada is negotiating two offerings of zero-coupon principal-protected notes linked to the Canadian dollar relative to the U.S. dollar.

One series of notes pay par plus 175% to 225% of the absolute value of any increase on the exchange rate while the other pays pay plus 200% to 250% of the absolute value of any decrease in the exchange rate. In both cases, investors will receive at least par at maturity.

Lehman plans real estate index notes

Elsewhere at Lehman, the investment bank intends to price bearish return enhanced notes with partial principal protection linked to the iShares Dow Jones U.S. Real Estate Index Fund.

The 18-month notes pay par of $10.00 plus triple the absolute value of any negative return on the index, capped at 28%. There is a 10% barrier and the investors will lose 1% for every 1% the index increases beyond 10%.

The notes are set to price July 26.

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