Deutsche Bank to offer bearish exposure to WTI crude oil via buffered notes with 2.1x leverage

By Emma Trincal

New York, March 17 – Deutsche Bank AG, London Branch’s 0% bearish buffered return enhanced notes due Sept. 22, 2016 linked to the performance of West Texas Intermediate crude oil futures contracts give investors a chance to make money very quickly if oil prices begin to fall again.

If the final price is less than the initial price, the payout at maturity will be par plus 2.1 times the underlying return, up to a maximum return of 42%, according to a 424B2 filing with the Securities and Exchange Commission.

The underlying return will be (a) the initial price minus the final price divided by (b) the initial price.

If the final price is greater than the initial price but not by more than 20%, the payout will be par.

If the final price is greater than the initial price by more than 20%, investors will lose 1.25% for every 1% gain beyond 20%.

Short bet

“It’s a gambler’s dream,” said Steve Doucette, financial adviser at Proctor Financial.

“But remember, it’s tough to evaluate oil as an investment.”

Unlike an absolute return structure, which provides positive return on both sides of the trade, the product has been created as a bearish note, he said. Investors in the product take a directional bet on the downside. They can only lose money or get protection if oil prices go up.

But the buffer, which protects the principal up to a 20% increase in the U.S. oil benchmark, is attractive, especially over a six-month period, he noted.

Another encouraging factor from a value standpoint is the recent rally in oil, as it provides a satisfying cushion.

West Texas Intermediate crude oil futures hit a new high for the year on Thursday, a move attributed to talks of a production freeze among OPEC members. A more dovish stance from the Federal Reserve Board announcing the previous day that it would cut in half the number of rate hikes this year also helped, as it caused the dollar to weaken.

Rally

WTI crude oil closed above $40.00 for the first time this year at $40.20 a barrel, a 40% surge from a $28.83 low a month ago.

“This rally adds to the appeal of rolling the dice on this one,” said Doucette.

“I might really do it ... probably for myself since it’s a speculative bet.

“But the risk-reward parameters are pretty compelling.”

Just as a long-only investor would want to buy on the dip, a short seller would strive to identify a higher point to initiate the trade, he explained.

“We just hit a new high. Not bad for an entry. If you’re wrong, if oil goes up, you still have this 20% protection.”

Due diligence

The fundamentals of oil, however, are not easy to evaluate. The investment would require some research on the underlying, he said.

“It’s hard to say where oil is going. You have to do your due diligence, but I see more press reports about oversupply than the opposite. It seems likely that oil prices will go down again at some point.”

The very short maturity is an advantage as well because it reduces credit risk exposure.

“We keep an eye on CDS spreads, including the spreads of European banks. But it’s highly unlikely that Deutsche Bank would go belly up in six months.”

Doucette said he would be looking into the details of the notes.

“You have to do more research. It always comes down to learning more about your underlying. But the way this note is structured gives you the potential for huge returns.”

Six months

Matt Medeiros, president and chief executive of the Institute for Wealth Management, said he is particularly interested in the short maturity.

“We don’t normally see six-month notes. And I don’t remember seeing bearish notes in a while. This is definitely interesting,” he said.

He noted that oil “had a nice run lately” but was skeptical about its resilience.

Headwinds

For buyers of the notes, who would short oil, some “headwinds” may emerge, he said.

He pointed to official talks between OPEC members leading them to agree to cut their output. Improved U.S. oil exports would also be beneficial for the bulls, hence negative for investors in the notes.

“Bulls obviously are concerned over the fact that we have enough reserves. There is excess supply in this market, which is what drove prices down so fast. If we could draw down on the reserves, prices could get a lift. But I don’t see this happening right away.”

Fundamentals

Improved U.S. oil exports would support prices as well.

“But it won’t happen overnight,” he said.

At best these developments supporting the bullish case may happen towards the end of the year, he predicted.

“But not in six months. And that’s the sweet spot.

“Oil has gotten a little bit ahead of what I think it should be.

“I’m definitely going to read the prospectus.”

JPMorgan Chase Bank, NA and J.P. Morgan Securities Inc. are the agents.

The notes will price on Friday and settle on March 23.

The Cusip number is 2515A1N64.

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