Commodities linked to several notes; Goldman prices $50 million notes linked to Russell 2000

By Sheri Kasprzak

New York, May 1 - Commodities continued to dominate structured products headlines on Tuesday as several investment banks announced plans to price commodity or commodity index-linked offerings, most of them principal protected.

"I think the recent interest in commodity-linked notes is pretty simple," said one market insider. "It is a product of the flat yield curve and low volatility-rate environment. People are searching for yield.

"There is a nice, neat macro story with commodities. And with equities breaching new highs, the diversification that commodities allow a retail investor - while protecting their principal - is also a huge plus."

Among the offerings announced recently was a zero-coupon, principal-protected deal from Citigroup Funding Inc.

Those three-year notes are linked to light sweet crude oil, aluminum, copper and gold. The weightings will be determined five days before maturity and depend upon the return of each component. The component with the greatest return will have 35% weight, the second-greatest 30%, the second-smallest 20% and the smallest 15%.

The notes pay par at maturity plus any basket gain or minus any basket decline with a cap of between 36% and 44%, determined at pricing.

Most notes linked to copper, zinc, aluminum

The majority of commodity-linked notes looking forward are expected to be linked to metals like aluminum, copper, nickel and zinc.

A market source familiar with commodities said Tuesday morning that the prices and increases in these metals for the month of April does make a difference.

"Of course it matters how nickel or copper or aluminum performs," he said. "The basket return is going to suffer if one of the metals has a major drop so that is something for investors to consider when buying these."

The prices in metals continue to rise, the market source noted, thanks to Chinese demand for them.

Aluminum prices rose by 16% during the first quarter of 2007. Copper prices jumped 13% for the month of April and gold edged up 2.2%.

Even though oil prices were down for the month of April, reformulated gasoline prices jumped by nearly 19%. Oil prices, however, were down 3% for the month of April.

Lehman plans commodities notes

Elsewhere, Lehman Brothers Holdings, Inc. announced its plans to price principal-protected base metals basket bonus notes linked to equal weights of grade A copper, primary nickel, special high-grade zinc and high-grade primary aluminum.

The three-year notes pay par times the basket return if the return is greater than 30%. If the basket return is greater than 0% but equal to or less than 30%, the notes pay par times 30% at maturity and if the basket return is equal to or less than 0%, the notes pay par at maturity.

In another offering linked to metals, Credit Suisse, Nassau Branch priced $5.985 million in zero-coupon Digital Plus ProNotes linked to equal weights of aluminum, copper, nickel and zinc.

Payout on the four-year notes will be par plus the basket return if the basket increases by more than 45%. If the basket increases but by less than 45%, payout will be 145% of par. Investors receive par at maturity if the basket declines.

RBC's notes

In a similar-sized offering linked to metals and crude oil, Royal Bank of Canada priced $5.153 million in zero-coupon principal-protected booster plus notes linked to equal weights of aluminum, nickel, zinc and crude oil.

Those notes also have a four-year term and pay par plus the basket increase at maturity if the basket level increases by more than 25%. If the basket level increases by 25% or less, investors receive par plus 25%.

If the basket level declines by up to 25%, the payout is par plus 25% minus the percentage decline in the basket level. Investors receive par if the basket level declines by more than 25%.

JPMorgan's commodity index notes

JPMorgan Chase & Co. said Tuesday it intends to price zero-coupon principal-protected notes linked to the Dow Jones - AIG Commodity Index.

The five-year notes pay par plus $1,000 times the index return times the participation rate, which is expected to be at least 118%, at maturity. Investors will receive at least par at maturity.

The notes are set to price on May 24.

Goldman's Russell 2000-linked notes

Elsewhere in structured products, The Goldman Sachs Group, Inc. priced a $50 million issue of zero-coupon notes linked to the Russell 2000 index.

The six-month notes pay par plus any index gain or minus any index decline at maturity, as

applicable, plus a supplemental return of 0.3%.

The index offers access to the small-cap segment of the equity market. The top 10 holdings for the index are Brocade Communications Systems, Inc.; Big Lots, Inc.; Phillips-Van Heusen Corp.; Hyperion Solutions Corp.; Varian Semiconductor Equipment Associates, Inc.; Hologic Inc.; Time Warner Telecom, Inc.; NBTY, Inc.; Alexandria Real Estate Equities, Inc.; and Polycom, Inc.

For March, the Russell 2000 index reported a 1.07% return. For the first three months of 2007, the index has produced a 1.95% return. The index closed down 15.13 on Monday to end at 814.57.

Eksportfinans prices Topix-linked notes

Another sizable offering came from Eksportfinans ASA, which priced $37.6341 million in zero-coupon enhanced-participation notes linked to the Topix Index through Goldman, Sachs & Co.

The notes have an 18-month term.

If the final index level is greater than the initial index level, investors will receive par plus three times the index return, capped at a maximum payout of 136.3% of par.

Investors are exposed to any decline in the index.

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