Merrill prices $42.39 million notes linked to commodity, currency indexes

By Sheri Kasprzak and LLuvia Mares

New York, Nov. 28 - Merrill Lynch & Co. led structured products news on Wednesday, pricing a $42.385 million offering of principal-protected notes linked to the Rogers International Commodity Index-Excess Return and the U.S. Dollar index.

The structure is a marriage between two recently popular underlyers, one market source said.

"There's a lot of hype behind commodities-linked stuff and currencies too, so this is an interesting structure," he noted.

The Rogers index tracks the performance of different commodities, including agricultural products, metals and energy.

The dollar index tracks the exchange rates between the U.S. dollar and six global currencies - the euro, the Japanese yen, the British pound, the Canadian dollar, the Swedish krona and the Swiss franc.

Terms of Merrill's notes

The three-year notes linked to a long position in the Rogers index and a short position in the U.S. Dollar index payout par plus the supplemental amount, which is equal to par times the 143% participation rates times the composite return, assuming the composite return is positive at maturity.

If the composite return is negative, the investors will receive par at maturity.

The starting value of the Rogers index is 3,323.01 and the starting value of the dollar index is 75.3841.

Lehman's BRICK notes

In other currency-related notes, Lehman Brothers Holdings, Inc. priced $1.636 million in notes linked to a BRICK basket.

"It's basically just a BRIC basket with the [Korean] won added in," said a market observer. "I've seen other notes customized around a standard BRIC structure, so it really isn't that odd to me. If your client wants something else in addition to the traditional BRIC, it's really not that big of a deal to add something in."

The notes are linked to equal weights of the Brazilian real, the Russian ruble, the Indian rupee, the Chinese renminbi and the Korean won.

The two-year notes pay par times the 250% leverage times the basket return.

Lehman also priced a proper BRIC-linked note in principal of $2.02 million. Those notes have a two-year term and pay par times the 280% participation rate times the basket return, at maturity.

JPMorgan to price commodities-linked notes

In other news, JPMorgan Chase & Co. is working on two offerings of zero-coupon principal-protected offering of dual-directional notes linked to a basket of commodities and commodities indexes, but the notes may not be so easy for investors to swallow.

"This JPMorgan product has a lot of moving parts if you compare it to products with 100% protection, 100% upside and short maturities," said a market specialist.

"It's complicated, it's much longer in duration and it will be a much harder sell when you try to explain to an investor why they should take those five slices that are so disjointed and not comprehensive. It doesn't feel cohesive."

The market source noted that the five-year maturity doesn't help its appeal.

Both notes are linked to a basket that includes 35% weight in West Texas Intermediate crude oil, a 15% weight in primary aluminum, a 15% weight in grade A copper, a 15% weight in the S&P GSCI Precious Metals Index Excess Return, a 10% weight of the S&P GSCI Livestock Index Excess Return and a 10% weight of the S&P GSCI Agriculture Index Excess Return.

For one issue, assuming the final basket level is at least the initial level, the payout at maturity is par plus 134% of any gain on the basket. The exact participation rate will be determined at pricing.

Otherwise, the payout at maturity will be par plus 30% of the absolute value of any loss on the basket. The exact downside participation rate will also be determined at pricing.

For the other, the upside participation rate is 118% and the downside is 20%.

Both notes are set to price Dec. 18.

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