Deutsche Bank's review notes tied to S&P GSCI Brent unusual for daily review, fixed premium

By Emma Trincal

New York, Aug. 30 - An autocallable product to be brought to market by Deutsche Bank AG, London Branch offers investors a chance to earn more when the notes get called early, which is not typical with those structures, sources said. In addition, the daily review makes the early exit outcome more likely to happen, they noted.

Deutsche Bank plans to price 0% review notes due March 7, 2012 linked to the S&P GSCI Brent Crude Oil Index Excess Return, according to an FWP filing with the Securities and Exchange Commission.

The notes will be automatically called at par plus a premium if the index closes at or above the initial index level on any day from and including Dec. 2 to and including March 2, 2012. The call premium is expected to be at least 6.75% of par and will be set at pricing.

If the notes are not called and the final index level is at least 80% of the initial level, the payout at maturity will be par. Otherwise, investors will lose 1% for every 1% that the index declines from the initial level.

Daily observation

"What's nice about it is the daily review and the fact that you can make a good return," a market participant said.

"The first time you can get called is in three months. But after that, you have three months on a daily basis to hit the trigger.

"Since you have a chance to be called every day as opposed to once a month or once a quarter, you're more likely to make money."

"In addition, oil moves around quite a lot, which makes it easier for you to hit the trigger."

The notes will be sold by JPMorgan.

"I've seen some daily review notes being done by JPMorgan before. This is not the first time. They've done these kinds of products in the past with the S&P 500," he said.

"It's definitely attractive."

Fixed premium

This market participant said that with a traditional autocallable, there is an annualized call premium that increases with time. In such deals, the later the call, the more return for the investor.

"This structure is different in that you get a fixed premium of 6.75% no matter when you get called," he said.

While the three months of call protection would be a plus in a regular autocallable structure, it's the opposite with this product, he said.

"Ideally, you'd want to be called right away. A call protection for a month would be much better than for three," he said.

"That said, it's a good deal because it's great to be able to make more when you get called early."

For instance, an early redemption on the third month would generate a 6.75% return for that period, which is 27% on an annualized basis, he said.

On the other hand, a call after six months would generate an annual return of 13.5%.

"Most of the structures within the callable space have an increasing call premium. With these, you don't want to be called early because you get a higher call premium if you stay for a longer period of time. But not this one," the market participant said.

Eric Greschner, portfolio manager at Regatta Research & Money Management, said that he likes the daily review feature.

"It's likely to be called probably within days after the three months non-call," he said.

"It's almost like a digital daily review: either it is or it's not, and if it works out, you're going to receive the fixed coupon," he said.

"It's not an American style of option. It's a unique structure.

"I see it as a fairly attractive deal if we don't go into another recession."

Barrier and timing

Greschner said that the downside protection is not as efficient as a plain buffer.

"My concern is the barrier. You have the unlimited downside risk and the asymmetry between the upside and the downside that you find with reverse convertibles," he said.

While the barrier is not the most positive part of the deal, Greschner said that he would buy the notes if they could price later than the announced date of Sept. 2.

"If I'm going to take a barrier, I'd rather have a few other weeks before I get in," he said.

"My main concern is the huge systemic issue with the banks in Europe right now. The CDS spreads are going to the ceiling."

Greschner said that he would want to wait until late September, when the German Parliament votes on the Greek bailout.

Additionally, the Sept. 20-21 meeting of the Federal Reserve Bank's Federal Open Market Committee would be something to watch too, he said.

"There is definitely political risk, headline risk. But overall, I find this structure very attractive," he said.

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