Deutsche Bank's leveraged buffered notes tied to Russell 2000 target bulls seeking protection

By Emma Trincal

New York, March 4 - Deutsche Bank AG, London Branch's 0% buffered return optimization securities linked to the Russell 2000 index are designed for very bullish investors who still want to limit their downside risk, said structured products analyst Suzi Hampson.

The notes due March 28, 2013 offer a payout at maturity of par of $10 plus 1.25 times any gain in the index, up to a maximum return of 23% to 28%, according to an FWP filing with the Securities and Exchange Commission.

The exact cap will be set at pricing.

Investors will receive par if the index falls by up to 15% and will be exposed to any losses beyond 15%.

Strong bulls

"You're getting a moderate gearing of 1.25 times, which fits the view of someone who expects the index to grow substantially during the term," said Hampson.

"This allows you to get a higher cap. That's what a pretty bullish investor would be looking for.

"On the other hand, someone expecting the index to grow less may prefer more leverage even if that means a much lower cap."

In order for an investor to receive the maximum return, the index would have to grow by 18% to 22.4%, Hampson noted.

"It's quite a lot. You have to be pretty bullish to make that call."

Downside protection

The notes are also designed to offer downside protection with a 15% buffer.

As a result, the product stands at the lower end of the risk spectrum as measured by a 3.96 riskmap.

Riskmap is a Future Value Consultants rating that measures the risk associated with a product on a scale from zero to 10.

"If you only look at the upside, this product is quite similar to a direct investment in the fund because you have not much leverage and a high cap. The real difference lies in the downside protection," Hampson said.

"The buffer is an important risk-reducing factor. And you have a 15% buffer here rather than the 10% which we typically see.

"There is also the fact that you have a one-for-one gearing on the downside. Some products also have a gear on the downside.

"Finally, you have a buffer in place, not a barrier. With a barrier, you lose the same amount as the index, which can be up to 100%. Here, you have 15% of your principal that's protected."

Return score

Another good score is the 6.18 return rating, Hampson noted.

This rating is Future Value Consultants' indicator, on a scale of zero to 10, of the risk-adjusted return of the notes.

The relatively big buffer explains the above-average score, Hampson said, noting that the average return rating is 4.25.

"If your index declines by 20%, you only lose 5%. It has a strong impact on your return potential," she said.

The probability tables of product return outcomes reflect the strong return rating.

Future Value Consultants calculates the probability tables using a Monte Carlo simulation, modeling performance based on a series of parameters such as volatility, dividends and interest rates.

According to the tables, investors have a 27% probability of losing some capital versus a 73% chance of generating a positive return.

In terms of gains, the greater probabilities apply to the highest return bucket: there is a 47% chance for an investor to gain between 10% and 15%. Given the 23% to 28% cap, the maximum return per annum would be 11% to 13.28%.

"This product has a pretty good return rating," said Hampson.

"At nearly 50%, you have a very [good] chance to earn the maximum gains.

"It's also because with the buffer, your losses are going to be less than if you had a barrier. Even though you have a decent probability of losing more than 5%, your losses are going to be a lot less than if you had a simple barrier. The amount of losses can penalize returns more than the probability of losses."

Overall rating

The notes also offer very good value, said Hampson, in reference to the 9.13 value rating.

Based on a scale of zero to 10, the value score measures the real value to the investor after deducting the costs the issuer charges in fees and commissions on an annualized basis.

"All the scores for this product are quite high. You have a good risk profile, a good opportunity to hit the cap, and in addition, the product is fairly priced. That gives you a pretty high overall rating of 7.82," she said.

The overall rating, on a scale of zero to 10, is Future Value Consultants' opinion on the quality of a deal, taking into account costs, structure and risk/return profile.

The notes will price on March 28 and settle on March 31.

The Cusip is 25154P329.

UBS Financial Services Inc. and Deutsche Bank Securities Inc. are the agents.

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