JPMorgan's commodity index-linked notes include rare appearances of precious metals, agriculture indexes

By Sheri Kasprzak

New York, Aug. 23 - Recent notes from JPMorgan Chase & Co. linked to a basket of commodity indexes include measures that track agriculture, livestock and precious metals, indexes that are rare in baskets of this kind, an analyst said Thursday.

"You don't see that often," said Tim Mortimer, managing director of Future Value Consultants, a London-based firm that analyzes derivatives products. "Mostly it's industrial metals and energy and this makes it that much more appealing."

Mortimer said as far as commodity-linked offerings go, he feels products linked to indexes of this kind are preferable to futures.

"Indices like this give a slightly better feel of what's going on," Mortimer said. "It gives a better reflection of what's going to happen in commodities than what the futures market can."

A market insider pointed out that the basket of indexes give investors access to commodities that would be almost impossible to access elsewhere.

Mortimer said he agrees.

"It's almost impossible to invest in commodities outside of something like this," said a market insider earlier this week.

Deal terms

JPMorgan, earlier this week, priced $3 million in the three-year principal-protected notes.

The notes are linked to a 25% weighting of the S&P GSCI Agriculture Index Excess Return, a 35% weighting of the S&P GSCI Energy Index Excess Return, a 20% weighting of the S&P GSCI Industrial Metals Index Excess Return, a 10% weighting of the S&P GSCI Livestock Index Excess Return and a 10% weighting of the S&P GSCI Precious Metals Index Excess Return.

The three-year notes pay par plus an additional amount equal to the principal amount times the basket return times the 120% participation rate. The additional amount may be zero.

InterOil's 124% 90-day volatility

Elsewhere, two offerings of reverse convertibles notes with a coupon of more than 40% were announced earlier this week linked to InterOil Corp.

Mortimer said Thursday that the company has a 90-day volatility of 124%.

ABN Amro Bank NV priced $600,000 in 45% Knock-in Reverse Exchangeable Securities and Eksportfinans ASA priced $750,000 in 40% reverse convertible notes, both linked to InterOil.

A combination of several factors may have pushed the volatility level way up on these notes, including oil prices and credit troubles in the U.S. market, Mortimer said.

"It's really a bit of everything," he noted.

Both notes have a three-month term. The ABN Amro notes have a 75% knock-in level and pay par at maturity unless the stock falls below the knock-in level during the life of the notes and ends below the initial share price. Eksportfinans's notes have a 60% knock-in level and also pay par at maturity unless the stock falls below the knock-in level during the life of the notes and ends below the initial share price.

Should this happen, both notes will pay a number of the respective shares equal to $1,000 divided by the initial share price.

"It's quite an interesting trade," said Mortimer. "In one profile, you have a 25% downside and pays a dividend of 11.25%. The other has a 40% downside and a 10% coupon. The extra buffer seems to be very valuable. Probably, if that was me, I'd be quite happy with 10% over a quarter rather than a narrow buffer zone over three months."

Lehman's foreign currency notes

Elsewhere, Lehman Brothers Holdings, Inc. plans to price notes linked to the euro, the British pound and the Canadian dollar, all with short positions, against a long position in the U.S. dollar.

The notes seem to indicate an improved U.S. dollar whereas other notes recently have pitted foreign currencies with long positions against a short position in the U.S. dollar and indicated continued weakness in the dollar.

Mortimer said he feels Lehman is offering this contrarian structure to provide an offering for investors who believe the U.S. dollar will appreciate over the next year - the term of the notes.

"From the bank's point of view, if they're issuing products both way, its helps them with their trading," Mortimer said. "From their view, there is going to be some demand both ways."

Deal terms

For each month that the basket value is greater than zero, investors will receive a coupon payment at an annual rate that will be determined at pricing and expected to be between 6.5% and 7.5%. If the basket value is zero or less, there will be no coupon payment.

The payout at maturity will be par.

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