Commodity-linked notes stay robust on bullishness, products' efficiencies, distributor says

By Kenneth Lim

Boston, July 9 - Products linked to commodities continue to be a strong segment of the structured universe because of economic optimism and the basic advantages of a structured solution, a distributor said.

Issuers are currently offering a number of products linked to commodities.

Deutsche Bank AG, through its London Branch, plans to price zero-coupon market contribution securities due July 16, 2010 linked to the Deutsche Bank Liquid Commodity Index - Mean Reversion Plus Total Return.

The payout at maturity will be par plus the index return and minus an adjustment factor of 0.85%.

Royal Bank of Canada is offering zero-coupon buffered bullish commodity notes due July 31, 2013 linked to the S&P GSCI Excess Return index.

The payout at maturity will be par plus 100% to 105% of any index gain, with the exact participation rate to be set at pricing. Investors will receive par if the index declines by 15% or less and will lose 1% for every 1% that the index declines beyond 15%.

Barclays adds EM to commodities

Barclays Bank plc's offering comes with an emerging-markets spin. The bank plans to price zero-coupon principal-protected notes due July 17, 2012 linked to a basket of BRIC currencies and the Dow Jones-UBS Commodity index.

The basket includes the Dow Jones-UBS Commodity index with a 50% weight, along with the Brazilian real, Russian ruble, Indian rupee and Chinese yuan, each with a 12.5% weight, all against the dollar.

If the basket appreciates, the payout at maturity will be par plus any gain on the basket, subject to a maximum return of 25% to 35%. The exact cap will be set at pricing. If the basket return is zero or negative, the payout at maturity will be par.

"Investors have been seeking access to emerging markets through various investments including EM Equities, BRIC currency baskets and commodities," a Barclays spokesperson told Prospect News in a statement. "Combining FX and commodities into a structured note is simply another way for investors to approach this compelling topic."

Riding economic hopes

Commodities continue to be a healthy business in structured notes as recent optimism about the global economy draws money into the asset class, the distributor said.

"Investors are generally more interested in asset classes that they feel bullish about," the distributor said.

"Commodities is enjoying the effect of investors becoming more optimistic about the state of the global economy. As economies recover, commodity prices should recover as well, so I think investors who are bullish about the global economy see commodities as a way to gain exposure to a recovery."

But commodity-linked structured products are also doing well in terms of sales volumes because their attraction for investors goes beyond the outlook for the underlying asset, the distributor said.

"Unlike equities where it's relatively simple to gain exposure to certain stocks or indices, it's not as easy when it comes to alternative asset classes like commodities, foreign exchange, interest rates," the distributor said.

"Structured notes offer relatively straightforward and convenient access to these alternative asset classes and they can do so in very tailored and efficient ways. I think whether markets are up or down, as long as there's confidence in the credit quality of the issuer, commodities and FX structured products are always going to be valuable to investors."

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