Wells Fargo's $7.11 million notes tied to five commodities offer leverage, buffer, yet no cap

By Emma Trincal

New York, Jan. 4 - Wells Fargo & Co.'s $7.11 million of 0% access securities due July 8, 2014 linked to a basket of five commodities provide enhanced returns with no cap on the upside while giving investors partial downside protection, all features that make the structure compelling, sources said.

"If you're interested in commodities and believe that this asset class is going to continue to do well, it makes a lot of sense," said Frederick Wright, financial adviser at Smith & Howard Wealth Management.

The underlying basket holds equal weights of crude oil, platinum, copper, corn and cotton, according to a 424B2 filling with the Securities and Exchange Commission.

The payout at maturity will be par plus 145% of any increase in the basket. Investors will receive par if the basket declines by 15% or less and will lose 1% for every 1% that it declines beyond 15%.

Upside and downside

Carl Kunhardt, director of investment management and research at Quest Capital Management, said that he liked the fact that investors can get the benefit of leverage without seeing their return capped.

"You get a full participation on the upside, and you get a buffer. I like that," he said.

Diversification

He said that clients may use this type of product to diversify away from equities or other traditional asset classes.

"It would fit nicely in an allocation because the underlying assets are not correlated," he said.

The use of a commodities basket rather than a commodities index as the reference asset is also a factor that may potentially increase the upside without reducing diversification too much.

"It's unlikely that these five commodity prices are going to all move in the same direction at the same time," he said.

"This is a product that is not overly aggressive and not overly conservative."

Some conservative aspects of the notes include the buffer and the diversification of the underlying basket rather than the use of a single commodity price, he explained.

Anticipated limits

Wright said that the uncapped returns make the product unusual.

"I haven't seen a lot of deals like that. It's pretty nice," he said.

"I would imagine that it's perhaps because some of the underlying commodities have done so well lately, it's expected that their performance may be subdued looking forward," he added, noting that copper prices hit new records last year.

Wells Fargo Securities, LLC is the agent.

Fees are 2.25%.

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