Deutsche commodity note targets niche, advisor says; Barclays sees interest in carbon

By Kenneth Lim

Boston, June 30 - Deutsche Bank AG's buffered note linked to a commodity index is a simple product with a sophisticated underlying that requires firm research before investing, an investment advisor said.

Meanwhile, Barclays Bank plc said its recent exchange-traded note linked to the price of carbon credits was a reaction to growing interest among investors.

Deutsche links to commodities

Deutsche Bank plans to price a series of zero-coupon buffered underlying securities (BUyS) due July 30, 2015 linked to the Deutsche Bank Liquid Commodity Index - Mean Reversion Plus Excess Return.

If the final level of the index is higher than or equal to the initial level at maturity, investors will receive 1.55 times the index return plus par of $10,000. If the final level declines by no more than the buffer level of 20%, investors will receive par. If the final index level falls beyond the buffer, investors will lose 1.25% of their principal for every 1% decline in the index.

The Liquid Commodity index reflects the performance of a basket of futures contracts of West Texas Intermediate light sweet crude oil, New York Harbor No. 2 heating oil, high grade primary aluminum, gold, corn and wheat.

Notes target niche market

The notes are likely to attract a limited segment of the investment market, an investment advisor said.

"This is a very specific set of commodities and a very specific strategy which I can't imagine too many people other than some institutions or companies would want to get involved in," the advisor said.

"Well, the face value of the notes is $10,000, so that kind of gives you a clue who they're really targeting here. It's not the kind of retail investors I deal with."

The advisor said that, at first glance, the notes could potentially have a binary outcome.

"It's a little bit of a boom-or-bust kind of investment," the advisor said. "There is a buffer of 20%, I'll give you that, but honestly if you're only getting back your principal after seven years you're not doing so well. Of course, some people might be constrained, maybe they can only invest in commodities, so in that case the buffer might be useful. The thing to be aware of with products like this, in general, is that you stand to do well if your view is correct, but you really lose a lot if you're wrong."

Barclays sees carbon interest

Philippe El-Asmar, Barclays head of investor solutions for the Americas, said his bank's recently launched exchange-traded notes linked to carbon credit prices was a response to growing interest among investors.

Barclays priced $250 million worth of the ETNs due June 24, 2038 linked to the Barclays Capital Global Carbon Index Total Return. The note trades under the symbol "GRN."

Investors will gain or lose 1% for every 1% increase or decrease in the underlying index. The notes are sold at par of $50.

The Carbon index references the price of carbon emissions credits from the European Union Emission Trading Scheme and the Kyoto Protocol's Clean Development Mechanism.

"Carbon is actually a very interesting theme that we hear about from investors," El-Asmar said. "What we're bringing out is the first carbon-linked product that...provides real exposure to emissions, rather than some structured investment linked to equity or companies that are environmentally friendly."

Two key ingredients came together that made the product possible.

"I think that in general, emissions have been a focus and a growing one among investors, whether it's individuals or institutional investors, but also from corporate clients," El-Asmar said.

Also, "we have an established emissions trading business on a global basis," he said. "What we did was create what will be the benchmark emissions index...and we're making it available to investors."

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