Deutsche Bank's planned notes linked to Brent crude may repeat last week's successful deal

By Emma Trincal

New York, Oct. 13 - Deutsche Bank AG, London Branch's planned 0% return enhanced notes due Oct. 24, 2012 linked to Brent crude futures contracts will closely resemble a $65.15 million offering priced last week, and sources are predicting that the deal may be just as successful given its high leverage and its buffer.

The payout at maturity for the upcoming deal will be par plus 2.74 times any gain in the price of crude, up to a maximum return of at least 27.4%, according to an FWP filing with the Securities and Exchange Commission. The exact cap will be set at pricing on Friday.

Investors will receive par if the price of crude falls by up to 15% and will lose 1.17647% for every 1% drop beyond the trigger.

"It sounds like a good deal," said Michael Rose, director of trading at commodities and futures brokerage firm Angus Jackson.

Last week's offering, which priced Oct. 7, featured a slightly higher cap of 27.8% as well as just an inch more leverage at 2.78 times.

The one-year duration, the underlying, the 15% buffer and the 1.17647% downside leverage factor seen last week have been kept the same.

High leverage

Commenting on the upcoming issue, Matt Medeiros, president and chief executive of the Institute for Wealth Management, said, "It's quite a bit of leverage, and the cap appears to be low. It's for mildly bullish investors."

He noted that in order to reach the maximum return of 27.4% with a 2.74 leverage factor, investors need only a 10% increase in the underlying price for the year. "It's a moderate increase, in line with our estimate. But it makes sense in relation to the underutilization of this commodity in the past six months," he said.

Steve Doucette, financial adviser at Proctor Financial, said that he only invests in multi-asset underlyings, broad indexes or baskets. But he added that the deal offers some appeal.

"It's one of those single-commodity plays that we don't do. But it has a nice buffer. And 2.74 times is a heck of a leverage," he said.

Uncertain direction

The main problem, for Doucette, is the difficulty of anticipating the direction of crude oil prices.

The Brent crude oil benchmark especially, which tracks European oil produced in the North Sea and is used in Europe and the OPEC market, is viewed as more volatile than the West Texas Intermediate benchmark, which tracks oil that is refined mostly in the Midwest and Gulf Coast regions in the United States.

Perhaps the notes are tailored for those who follow the oil market but do not have conviction about its direction, he said.

"Who knows what oil is going to be a year from now? I guess the notes could be for people who are agnostic or ambivalent about the price of oil and who are trying to leverage it up. You only need a 10% growth to capture the cap," he said.

For Medeiros, the notes fit a moderately bullish outlook on oil, which he believes is accurate.

"We're slightly bullish on oil. We believe that oil will go up. Once the economic shocks are absorbed in the marketplace, people will travel again and the utilization of this commodity will increase," he said.

Incorporated into benchmark

The pricing of the notes may be timely for bulls, some sources said.

On Tuesday, Dow Jones Indexes announced the addition of the Brent futures contract as part of the crude oil component of the Dow Jones - UBS Commodity index. The new target weightings will be effective in January.

According to a Dow Jones press release, the addition represents the "acknowledgment of the Brent's economic significance as a global benchmark." Some, according to news reports, have already predicted that it may help boost prices.

But Rose said that it is unlikely.

"Adding this benchmark to an index will increase liquidity, and whenever there is more liquidity in the market, it's usually a positive," he said. "It's a huge help, especially when someone gets to be in one side of the market.

"But I don't think it's going to change the market's direction one way or the other. Some may say that adding liquidity will make the market rally, others that it will do the opposite. But liquidity is not going to drive the market in any direction it wasn't going to go by itself. It may exacerbate any move in any given direction but not hamper the market."

Geopolitics, economics

Despite the 15% buffer, the bet on Brent crude remains a gamble, sources said, especially with the downside risk compounded by the leverage factor beyond the buffer.

"Oil is an asset class that's more susceptible to move on political and economic news than a lot of other asset classes," said Medeiros.

"Brent returns have been clouded by world issues," said Rose. "With the Brent benchmark, you have to rely on the Middle East, a region that's in political turmoil, and that's an issue. If the region gets shut down, you get into a bind.

"That's why prices have been so inflated lately. Over the past six months, we've had nothing but Middle East tensions. Demand has decreased, but output has decreased tremendously as well.

"It's sort of hard to make the right call. I'm more comfortable with U.S. oil, for now. But I mean for now because anything can happen with oil in general."

He pointed to the strong impact of a sluggish economy on oil prices in general.

"Until this economic situation gets cleared out, people will do less in everything: industrial demand and personal consumption.

"If the world economy slows down, the first thing people pull out of is crude and energy, because that's the only thing you can control," he said.

The notes will settle on Oct. 19.

The Cusip number is 2515A1DQ1.

JPMorgan Chase Bank, NA and J.P. Morgan Securities LLC will act as agents. They were also the agents for last week's $65.15 million offering.

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