Deutsche Bank's notes tied to real vs. yen offer unusual structure for FX, popular bearish bet

By Emma Trincal

New York, May 8 - Deutsche Bank AG, London Branch's upcoming 0% autocallable securities due May 22, 2014 linked to the performance of the Brazilian real relative to the Japanese yen are an unusual product, sources said, both in terms of structure and underlying reference asset.

The notes enable investors to short the yen against the Brazilian currency. Returns are tied to the currency performance defined as the strengthening of the real relative to the yen, according to an FWP filing with the Securities and Exchange Commission.

The notes will be called at par plus an annualized call premium of at least 16.4% if the currency performance is greater than or equal to zero on Aug. 12, 2013, Nov. 12, 2013, Feb. 10, 2014 or May 19, 2014. The exact call premium will be determined at pricing.

If the notes are not called and the final currency performance is greater than or equal to negative 20%, the payout at maturity will be par, according to the prospectus. Investors will be fully exposed to losses from the initial level if the final currency performance is less than negative 20%.

Unusual structure

A market participant said that he was surprised to see an autocallable structure used with a currency underlying.

"I haven't seen that before. I haven't seen autocall features applied to FX products," he said.

Because the majority of currency-linked notes remain tied to the dollar, this market participant reasoned that the product was aimed at more sophisticated investors.

"It was probably designed for someone with a specific view on those two currencies. I can't imagine this product being offered to retail, at least we would never offer this to retail. It's a little bit complex to look at the relationship between those two currencies and put it all together into an autocallable reverse convertible structure."

Popular theme

Bearish bets on the yen against various currencies have flourished in the past few months amid recent policy changes in Japan aiming to combat deflation.

A new governor at the Bank of Japan recently launched an unprecedented monetary expansion policy, which drove down the value of the yen. The fall was the continuation of a sell-off that began late last year, triggered by the elections in December of a new prime minister, an advocate of monetary easing.

"There's already a big downward move on the yen versus the real. That's probably why they're able to price it. The forward probably looks different than what it was a year ago," this market participant said.

"Japan's recent shift in monetary policy has already caused the yen to decline, and there is no indication that Japan is going to change their way toward trying to reflate their economy. Still, a lot of that has probably been priced in. The forward curve may look flat or backwardated. That's why they were able to do this."

Another singularity of the product was the fact that it offered no exposure to the dollar, unlike the majority of currency-linked notes, he added.

"We had a fair amount of currency products two years ago when the Fed was embarking on an easy-money policy. The dollar was under pressure and you had a lot of notes tied to the dollar against the currencies of BRICs countries or against the currencies of commodities-heavy countries, such as Brazil, Australia, Canada and Norway.

"The dollar play has played itself out. This trade centers around the yen and leaves out the dollar, which is not that common, although we're seeing more of those."

Only six currency-based notes referencing the yen have been issued so far this year out of a total of 67 offerings, according to data compiled by Prospect News as of Friday. The bearish bets on the yen were made in relation to a single currency, such as the Chilean peso, the Mexican peso or the real, or in some cases in relation to a basket of currencies that did not include the dollar. Those yen-related notes amounted to $32 million out of $378 million issued in the currency asset class, or 8.5% of the total.

Specific view

"It could be an institutional investor with a view. U.S. investors, while they may think they're very knowledgeable about the value of the dollar relative to other currencies, may not be so savvy when it comes to the yen versus the real," the market participant said.

Jim Ziniel, a former structured notes marketer, said that he liked the terms of the product as well as the underlying investment theme.

"It's a very interesting trade. There's a lot of interest around the yen right now just because they're doing a lot of monetary easing. We're seeing a consensus around the idea that the yen will continue to fall as long as Japan's aggressive monetary-easing policy will remain in place, and many believe that it will at least for some time," he said.

"The structure is also interesting considering that we are in a low interest rates environment. To be able to get 16% a year is very attractive. You'll probably get 4% in three months since people usually get called early on. Still, 4% in three months, that's not bad.

"They also give you a European barrier, which is always better than a barrier that can be triggered any time.

"It's probably research-driven. You wouldn't sell it to get critical mass but to appeal to people who are familiar with the currency."

Ziniel said that the same rules that apply to equity-linked notes sales should remain valid with other asset classes, especially with currencies, an asset class investors are less familiar with.

"This is only for investors who understand the risk and have a view on the two currencies," he said.

"It's very specific, and many retail investors may not understand it. But you could make that case for anything, including stocks. A financial adviser selling a reverse convertible on Procter & Gamble needs to have a view on the stock and has to understand the risks as well.

"This educational component is always there when it comes to the distribution of structured notes. Investors have to understand not only the structure but the risks associated with the underlying asset."

JPMorgan Chase Bank, NA and J.P. Morgan Securities LLC are the agents.

The notes are expected to price on Friday and settle May 15.

The Cusip number is 25152RCV3.

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