Deutsche, Svensk link to commodities; products tied to asset class still offer good access, distributor says

By Kenneth Lim

Boston, Oct. 14 - Commodity-linked structured products are weathering the broad investment slowdown as the access that they provide continue to attract buyers, a distributor said.

A number of commodity-linked products have appeared in the pipelines recently.

Deutsche Bank AG priced $18 million of floating-rate securities due Nov. 13, 2009 linked to the Deutsche Bank Liquid Commodity Index - Optimum Yield Excess Return.

The index comprises futures on crude oil, heating oil, aluminum, gold, wheat and corn.

The securities will pay a monthly coupon of one-month Libor minus 12 basis points.

The securities may be put by holders at any time. They may be called, and will be mandatorily called if the underlying index closes at 85% or lower of its initial level.

Upon redemption, the securities will pay par plus three times the index return less an annual 1.35% adjustment factor.

AB Svensk Exporkredit, via Merrill Lynch & Co. Inc., priced $27.3 million of zero-coupon notes due Nov. 20, 2009 linked to the S&P GSCI Official Close Index Total Return.

The index reflects the returns of the S&P GSCI commodity index with the returns on cash collateral invested in U.S. Treasury Bills.

The Svensk notes may be put by holders and will be automatically called if the underlying index closes at 85% or lower of its initial level.

Upon redemption, investors will receive par plus three times the index return less an annual 0.3% fee and the Treasury bill yield.

Commodity volatility up

Commodities have not been immune to the overall rise in volatility that has swept across the various asset classes, the distributor said.

"I would say volatility has generally gone up in most asset classes," the distributor said.

The increase in volatility has allowed issuers to offer non-capital protected products with potentially better returns, although the generous payouts are also accompanied by higher risks, the distributor said.

"It's a function of underlying volatility," the distributor said. "The investors can get structures that offer maybe a leverage factor of 2 instead of 1.8, just as an example, but that's because there's a greater risk of the structure not working out."

Non-equity business still healthy

Non-equity linked products are still holding up well despite the current market uncertainties because structured products continue to offer an alternative in harder-to-access assets, the distributor said.

"If you look beyond the reverse convertibles, there's really a lot that structured products can offer besides better yields," the distributor said. "Commodity products let investors access those assets without having to actually trade any futures, plus they can offer leveraged returns and even some downside protection. The same can be said of currency products, inflation products, interest rates."

Some commodities, especially gold, have also seen stronger interest, the distributor said.

"Investors are looking for ways to weather out this storm and to continue getting positive returns, and one of the ways is to increase exposure in asset classes that have negative or low correlations," the distributor said.

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