JPMorgan plans dual directional commodity offering; Lehman, HSBC link revcons to Southern Copper

By Kenneth Lim

Boston, March 3 - Commodity-related products continued to receive keen interest on Monday as a number of offerings linked to the asset class were launched.

JPMorgan Chase & Co. announced plans for 0% principal protected dual directional notes due Oct. 1, 2012 linked to a weighted basket of three commodities and three commodity indexes.

Mining company Southern Copper Corp. also saw at least two banks link reverse convertibles to its common stock.

JPMorgan plans dual-directional notes

JPMorgan launched a series of 0% principal protected dual directional notes linked to a weighted basket of three commodities and three commodity indexes.

The basket comprises WTI crude oil, with a 35% weight; primary aluminum, with a 15% weight, copper grade A, with a 15% weight; the S&P GSCI Precious Metals Index Excess Return, with a 15% weight; the S&P GSCI Livestock Index Excess Return, with a 10% weight; and the S&P GSCI Agriculture Index Excess Return, with a 10% weight.

The notes will yield a positive return as long as the basket ends at a different level from its start.

At maturity on Oct. 1, 2012, the notes will pay par of $1,000 plus an additional amount. That additional amount will be the basket return multiplied by an upside participation rate of at least 110% if the ending basket level is higher than the initial level. The additional amount will be the absolute basket return multiplied by a downside participation rate of between 20% and 25% if the basket ends below the initial level. The participation rates will be determined at pricing.

Commodity volatility increasing

Marilyn Cohen, chief executive and president of investment advisory firm Envision Capital, which specializes in fixed-income instruments, said volatility in the commodity markets have increased dramatically in the past several years.

"It's because of the ease of access to the market," she said. "Now you have a lot of ETF [exchange-traded funds] and so on, and it's no longer just an institutional market."

That increased volatility has changed the commodity investment landscape, she said.

"I think it keeps some of the buy-and-hold people out because they don't like the volatility," she said.

The recently launched exchange-traded notes by Deutsche Bank that offer exposure to both long and short strategies on the price of gold perked Cohen's interest.

"I'd be interested in seeing some of these," she said. "I have a broker at Deutsche, and I think I'll call him up to ask about them."

Cohen said commodity-linked products that are targeted at retail investors are likely to increase in number.

"I think that the institutions have been knee-deep in commodities for the last two years, but the retail guy just didn't know how to access them and how to proceed in the futures market," she said. But now that structured products and funds have opened the market to retail investors, "it's going to create more supply."

Cohen said she has not been active in the commodities market recently, and she may not take the trouble to get started because of the volatility.

"By the time I finally got in it'd probably be the top," she said.

Her current focus is on municipal debt, where turbulence from the credit crisis has exposed value in some bonds, she said.

"You're living on a trigger," she said. "There's going to be a deal or not going to be a deal, he's going to put in money, he's taking it away...You ask any old-timer like myself, it used to be, oh New York is in trouble, Orange County is facing bankruptcy, it was like one thing every decade or every five years, now something's happening every day."

Cohen said she has not yet seen structured products linked to municipal debt.

"That would be something new," she said. "It could be interesting."

Southern Copper sees interest

Lehman Brothers Holdings Inc. and HSBC USA Inc. are linking reverse convertibles to Phoenix, Ariz.-based mining company Southern Copper.

Lehman priced $750,000 of six-month 21.15% reverse exchangeable notes linked to Southern Copper's common stock.

At maturity, the Lehman notes will pay par unless Southern Copper's common stock has closed below the barrier level of 70% of the initial share price during the life of the notes and the stock finishes below the initial level.

If those two conditions are met, the return will be the number of shares of Southern Copper stock equal to par of $1,000 divided by the initial share price. The initial stock price has been set at $119.40, and the barrier trigger price at $83.580.

HSBC is planning 23.6% reverse convertibles due July 1, 2008 tied to the same common stock. The barrier level for the HSBC notes will be 80%.

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