Dollar plays make sense on balance; homebuilders a decent bet to improve; BRIC deals to keep coming

By Evan Weinberger

New York, Oct. 12 - This past week in the structured products market was a week for the downtrodden of the financial world. One investment bank provided investors a chance to bet on the U.S. dollar - not a popular bet in recent weeks - while several were betting on an improvement in the American housing market.

Bold bets indeed.

Tim Mortimer, managing director of Future Value Consultants, said there was one basic reason to make those bets. "It's got to rise at some point, I guess," he said in a telephone interview with Prospect News Friday.

Lehman Brothers Holdings Inc. priced $13.5 million of foreign exchange basket-linked notes due Oct. 13, 2009 linked to the performance of three currencies versus the U.S. dollar.

The underlying basket includes the euro with a 33.34% weight, the British pound sterling with a 33.33% weight and the Canadian dollar with a 33.33% weight.

The payout at maturity will be par plus 225% of any appreciation in the U.S. dollar versus the currency basket. If the U.S. dollar remains flat or depreciates relative to the basket, the payout will be par.

Lehman Brothers Inc. is the underwriter.

According to Mortimer, Lehman Brothers is using the dollar bet as a way to balance its books. There have been many bets against the dollar in recent months, and there may be some investors willing to go the other way. "Which I think is perfectly logical," Mortimer said. "There are always investors that want to go one way or the other."

Either way, banks don't want to have all their structures in one basket.

The tide is still moving against the dollar, at least the structured products tide. Mortimer pointed out that Goldman Sachs' $15.53 million of leveraged notes due Oct. 16, 2008 linked to a ruble basket for issuer Eksportfinans ASA, is much more a double bet against the U.S. dollar than a bet for the ruble.

This issue increases the deal size to $63.35 million.

The first tranche of $47.82 million in notes priced on Oct. 1.

The basket consists of the exchange rate of the ruble against the dollar with a two-thirds weight and the exchange rate of the euro against the dollar with a one-third weight.

The payout at maturity will be 107.9% of par plus 250% of any gain on the basket. Investors will receive at least par.

"It kind of spreads the risk from these currencies," he said. "If you have a straight currency pair, there's always a chance that you could get hurt.

Rubles spread the risk

Goldman, Sachs & Co. priced $5.77 million of zero-coupon binary notes due Oct. 16, 2008 linked to a ruble basket for issuer Eksportfinans ASA.

The basket consists of a 50% weight of the ruble against the dollar and a 50% weight of the ruble against the euro.

The payout at maturity will be 108% of par if the basket gains by 0.5% or more, otherwise the payout will be par.

Mortimer said that the story here is not so much the strength of the ruble, but the desire among investors to not be tied down to one currency among the BRICs. He added that he expects to see future emerging market bets to be "spread around in major industries as well, not just currencies."

Housing hopes

A bevy of deals came in this week linked to homebuilders, particularly Toll Brothers, Inc. and D.R. Horton, Inc., signaling that investors may just be ready to bet that the worst is over in the housing market. But aside from that, Mortimer said, the stocks and the deals themselves have some innate attraction.

"I guess with all the subprime fun, the volatility of these stocks has gone up," he said.

Plus, Mortimer added, the "juicy" coupons attached means that investors can profit during the short life spans of the deals without needing much of a rise in the stocks. "You don't need it to actually go up from here. Staying at its current levels will do," he said. "All you really need is for it to go sideways."

Lehman Brothers priced a $1.65 million issue of 19% annualized reverse exchangeable notes due April 15, 2008 linked to the common stock of Toll Brothers.

Payout at maturity will be par unless Toll Brothers stock falls below the knock-in price of $13.638 - 60% of the initial value - during the life of the notes and finishes below its initial price of $22.73, in which case the payout will be a number of Toll Brothers shares equal to $1,000 divided by the initial share price.

Lehman Brothers is the agent.

Barclays Bank plc priced $3 million of 19.1% reverse convertible notes due April 14, 2008 linked to Toll Brothers stock.

Payout at maturity will be par in cash unless Toll Brothers stock falls below the protection price of $15.91, 70% of the initial price of $22.73, during the life of the notes and finishes below the initial price in which case the payout will be 43.994721 shares of Toll Brothers stock.

Barclays Capital is the agent.

JPMorgan Chase priced $882,000 of 17.5% reverse exchangeable notes due Jan. 11, 2008 linked to Toll Brothers common stock.

If Toll Brothers stock falls below 70% of the initial share price during the life of the notes and finishes below the initial share price, the payout will be a number of Toll Brothers shares equal to $1,000 divided by the initial share price.

Otherwise, the payout will be par.

J.P. Morgan Securities Inc. is the agent.

Lehman Brothers priced a $1.5 million issue of 19.25% reverse exchangeable notes due Oct. 12, 2008 linked to the common stock of D.R. Horton.

The payout at maturity will be par unless the stock falls by more than 40% during the life of the notes and finishes below the initial share price, in which case the payout will be a number of D.R. Horton shares equal to $1,000 divided by the initial share price or, at the bank's option, the equivalent cash value.

Lehman Brothers Inc. is the underwriter.

JPMorgan Chase plans to price an issue of 18% reverse exchangeable notes due Oct. 31, 2008 linked to the common stock of D.R. Horton.

The payout at maturity will be par unless D.R. Horton stock falls below the knock-in price - 60% of the initial share price - during the life of the notes and finishes below the initial share price, in which case the payout will be a number of D.R. Horton shares equal to $1,000 divided by the initial share price or, at JPMorgan's option, the equivalent cash value.

The notes will price on Oct. 26 and settle on Oct. 31.

J.P. Morgan Securities Inc. will be the agent

Despite the somewhat audacious bets on the U.S. dollar and homebuilders, Mortimer said that there was little sizzle to the structures in a solid week. But, he added, investors should be pleased with the selection in front of them. "There's something in there for a wide range of investors at the end of the week," he said.

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