Deutsche Bank's $40 million floaters on Dow Jones - UBS Commodity attest to bullish momentum

By Emma Trincal

New York, Feb. 15 - Deutsche Bank AG, London Branch's $40 million of securities due March 15, 2012 linked to the Dow Jones - UBS Commodity Index Total Return exemplified, given its size, the popularity of commodities, a trader said.

The protection mechanism incorporated in the structure via a call feature as well as the symmetry of leverage made the product more risky than the average leveraged note, sources noted.

Bullish sentiment

"The public is really clamoring for anything commodity related," the trader said. "As long as there's commodities, everybody thinks it's going to go to the moon."

The notes offered three times leverage on both the upside and the downside with no cap and no buffer.

"It was a popular deal, obviously. But I don't know if they looked at the structure or said 'I can get three times leverage!'" the trader said. "I wouldn't base that demand on the quality of the structure but on the herd instinct of the general public."

Interest equals one-month Libor minus 15 basis points and is payable monthly, according to a 424B2 filing with the Securities and Exchange Commission.

The payout upon redemption or at maturity will be par plus triple the sum of the index return minus the TBill return minus the adjustment factor.

The TBill return will be the sum of the 91-day weekly auction high rates for U.S. Treasury bills for each day during the life of the securities. The adjustment factor will be the greater of 0.18% per year and a flat rate of 0.025%.

The securities are putable at any time subject to a minimum of $1 million principal amount. They will be called if the index declines by 15% or more, in which case the final index level used to determine the index return will be the index level on the day following the day on which the call was triggered.

Stop in place

"You do get some protection," the trader noted, pointing to the call feature triggered at a 15% decline of the index.

"They call the notes at a 15% down, and that's a regular stop," he said.

The trader said that while the stop was not as efficient as a buffer, investors still benefited from some protection.

"Even if your price goes through the stop in one day, it's only a one-day event. For instance, it could go down 20% in one day, but it's not like it gets down 20%, then 20% down, then 20% down day after day.

"There's a risk of the price going through your stop, but it would happen only for one day."

Stop by stop

Al Baker, financial adviser at Pathway Financial, said that the protection was inadequate.

"I don't really see why this deal was so popular. Anytime you have leverage, you should have a stop at the leverage level, which you don't have here," he said.

"They're just putting the leverage into the structured product without protection. A structured product should build protection into it."

Baker said that investors could easily lose money given the amount of leverage and the volatility of the underlying asset class.

"Commodities tend to have big sell-offs, so your 15% stop can be blown off quickly," he said.

Instead of a stop triggering a call at a 15% decline of the index, Baker suggested a "gradual stop," which would break down the amount of principal to be redeemed in different portions.

"You have three times leverage. So you could get a knock-out for a 5% price decline with one-third of your principal getting called, then a 10% decline would trigger another third, and finally you would get 100% of your principal out with a 15% decline," he said.

"This way if it blows through at the first stop, you still have two other stops that still take care of the rest of the leverage," he said.

Baker explained that one advantage of this gradual stop mechanism would be to avoid full redemption if the notes get called when the price hits bottom, giving investors a chance to recoup their losses.

"You don't want to limit your basic positions. All you need to do is limit leverage," he said.

Deutsche Bank Securities Inc. and Deutsche Bank Trust Co. Americas are the agents.

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