Lehman prices FX notes linked to dollar/real, $200 million in curve trade notes linked to CMS rate

By Sheri Kasprzak

New York, Jan. 26 - Lehman Brothers Holdings Inc. led structured products news to close out the week, pricing an issued $5 million in Foreign Exchange Digital Notes linked to the U.S. dollar/Brazilian real spot exchange rate and $200 million in Curve Trade Notes linked to the CMS rate.

The exchange rate notes are interesting, said one equity structurer based out of New York, because the real has traditionally been linked along with other currencies in a basket and because the real is already trading above the target rate against the U.S. dollar.

The offering, he said, doesn't make much sense because the real is gaining in strength.

"You're basically betting here that the rate [against the dollar] is going to drop and I don't see that happening," he said.

Even so, investors can expect to at least receive par at maturity - in just two months.

The market source also noted that, if anything, investors may see more exchange-rate basket offerings including the real given its recent strength and anticipated growth.

Deal terms

Under the terms of the exchange rate notes, payout at maturity will be par plus 2.34% if the exchange rate is less than or equal to 2.1081 Brazilian reals per U.S. dollar on March 27.

On Friday, the exchange rate was 2.1385 reals per dollar.

Earlier this month, Lehman announced plans to price two-month Foreign Exchange Range Notes linked to the Brazilian real/dollar spot exchange rate.

Those notes will pay 102.34% of par if the real/dollar exchange rate remains between the initial exchange rate and the reference level, which is equal to 0.35 cents lower than the exchange rate.

If the euro/dollar spot exchange rate falls outside the reference range during the life of the notes, payout at maturity will be par.

Lehman prices CMS rate notes

Elsewhere at Lehman, the investment bank negotiated the terms of $200 million in Curve Trade Notes linked to constant maturity swap rates (CMS rates).

In a bet on a steepening yield curve, the 10-year notes pay 6% annually until Aug. 5, 2007 when the interest rate will be reset quarterly and will equal 2.51% plus 8 multiplied by the spread of the 10-year CMS over the two-year rate.

The deal was priced at 97.1.

Morgan Stanley's S&P-linked notes

In other structured products news, Morgan Stanley is gearing up to price buffered return enhanced notes linked to the S&P 500 index.

The offering is one of several buffered return enhanced notes linked to the S&P 500 announced recently.

In the most recent offering, the 20-month notes pay twice the gains on the index up to 16.36% at maturity. Investors will lose 1.1111% of their investment for every 1% drop in the index beyond 10%.

Earlier this month, JPMorgan Securities Inc. priced $10 million in 0% buffered return enhanced notes linked to the index for Barclays Bank plc.

Also this January, JPMorgan announced plans to price 0% buffered return enhanced notes linked to the S&P for Merrill Lynch & Co.

Both of those notes have similar terms as the Morgan Stanley offering, which is set to price Feb. 2.

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