Lehman Brothers is marketing a series of credit-linked notes which deliver enhanced returns to holders by storing away a portion of profits throughout the life of the transaction in a loss-protected account. The structure is the first to feature this specific holding mechanism, credit officials noted, and other dealers are believed to be eyeing the play. Names of these firms could not immediately be determined.
In the structure, Lehman pays an annual coupon into an account, called a synthetic reserve ledger, which is handed to note holders at the maturity of the deal. The level of profits injected into the ledger is determined by trading gains and loses in the underlying reference portfolio, which comprises synthetic sovereign and corporate debt. Investors continue to receive coupons throughout the transaction linked to the performance of the portfolio, but this is smaller than usual, for instance 7% rather than 10%. Because the cash in the ledger is accumulated and protected, this creates additional contingent credit enhancement and a more attractive rating, said one credit official who has studied the transaction.
Lehman is issuing EUR10 million of the seven-year notes, which are called Orion Enhanced Return Dynamic CDO Credit Linked Synthetic Portfolio Notes. They have been assigned a rating of A3 by Moody's Investors Service. Officials at Lehman declined all comment.
