Merrill sells $93.6 million commodity index notes; Lehman plans notes linked to commodities

By Sheri Kasprzak and LLuvia Mares

New York, Sept. 7 - Commodities-related offerings abounded on Friday with Merrill Lynch & Co. releasing the pricing terms on $93.6 million in Accelerated Return Notes linked to the Dow Jones - AIG Commodity Index.

Barclays Bank plc also has an offering of commodity- and index-linked notes coming up.

Lehman Brothers Holdings, Inc. is also getting in on the commodity action, planning to price notes linked to nine commodities.

"This is the place to go when you want to invest in commodities," said one market insider on Friday afternoon. "It's a lot easier for investors to look at something like this, a basket of commodities or indexes, and take a stake in these [commodities]."

The market insider noted that U.S. investors are still new to commodities.

"Probably in the last two or three years we've seen them more prominently," he added. "They have been very popular though. I feel like maybe in the next few years, you'll see other types of commodities out there, maybe more agriculture-related, than we're seeing now. Right now, you've got a lot of metals, oil, things like that."

Triple upside exposure

The Merrill notes, priced recently, have a 14-month term and triple upside exposure, capped at 29.1%.

The notes pay par plus triple the index return, subject to the cap, if the final index value is greater than the initial value. The initial index level is 165.10.

If the final index level is less than the initial level, investors participate in the loss.

On Thursday, the index closed at 166.848. At the end of August, the index closed at 165.566 and at the end of July, the index ended at 172.446.

Barclays' notes include equity index

Elsewhere, even though Barclays latest offering of 100% principal-protected notes are linked to a basket of three commodities, the notes are also linked to the FTSE/Xinhua China 25 index.

"I assume the strategy here is diversification," said one market source. "Don't just offer commodities but an index as well."

The notes have a five and a half-year term and are linked, in addition to the FTSE/Xinhua China 25 index, to aluminum, copper and zinc.

The zero-coupon notes pay par plus the principal amount times the product of the participation rate and the basket performance, assuming the basket performance is equal to or greater than 0%.

If the basket performance is less than 0%, the investors receive par at maturity.

Lehman plans similar notes

In other news related to commodities-linked notes, Lehman Brothers plans to price principal-protected note with enhanced participation linked to crude oil, heating oil, copper, nickel, zinc, gold, platinum, corn and wheat.

The notes are linked to 20% weighting of crude oil and 10% weighting each of heating oil, copper, nickel, zinc, gold, platinum, corn and wheat.

The three-year notes pay par plus the principal amount times the basket return times the upside participation rate, which is expected to be at least 115%, assuming the final basket level is greater than the initial basket level.

If the final basket level is equal to or less than the initial basket level, the investors receive par at maturity.

Merrill's 'home run'

Merrill Lynch's announcement of its $516 million issue of 0% Accelerated Return Notes linked to the S&P 500 index has some market professionals applauding the success of the deal.

"For Merrill Lynch that is a major homerun, even by Merrill Lynch standards," said Keith A. Styrcula, Structured Products Association chairman. "To sell a half-billion dollars of that product in this environment is compelling."

The Accelerated Return Notes are due Sept. 5, 2008.

If the final index level is greater than the initial index level, the payout at maturity will be par plus three times the positive return on the index, up to a maximum return of 18.87%. Investors will receive at least par.

"Because the market volatility right now is allowing very interesting and compelling payoff profiles on the S&P 500, as much as everybody is concern about a credit crisis and dislocations in the equities market it creates opportunity for very interesting structured products," said Styrcula. "And I think that Merrill is taking advantage of that quite handsomely with a half-billion dollar offering."

Styrcula said this type of structure has been performed before by JPMorgan, Morgan Stanley, Lehman Brothers and Merrill Lynch.

"The environment makes it a very compelling structure," he said.

The notes will be listed on the American Stock Exchange under the symbol "AGW."

Merrill Lynch & Co. is the underwriter.

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