UBS call warrants offer leveraged variety for investors; Lehman ties to six month-old commodities index

By Kenneth Lim

Boston, March 12 - UBS AG's offering of two-year call warrants linked to a basket of 18 stocks is a leveraged product that targets the usual high net worth investors, a source familiar with the structure said.

UBS this week launched the product, which is expected to price on March 26.

The basket comprises the common stocks or American Depository Shares of Diageo plc, Qualcomm Inc., Colgate-Palmolive Co., Kimberly-Clark Corp., Procter & Gamble Co., McDonald's Corp., Coca-Cola Co., Telefonica SA, Vodafone Group plc, United Technologies Corp., Expeditors International of Washington Inc., Cisco Systems Inc., ABB Ltd., 3M Co., Air Products and Chemicals Inc., Praxair Inc., Schlumberger Ltd. and Weatherford International Ltd.

Expeditors, Cisco, ABB, 3M, Air Products, Praxair, Schlumberger and Weatherford have a 5.55% weight each. The other 10 have a 5.56% weight each.

The warrants expire on March 26, 2010.

The warrants will pay the return lose part of their investments if the basket return is positive but less than the warrant premium, which will be set between 14.5% and 16%. The payout at expiration will be the return on the basket multiplied by the notional amount, which will be the issue price of $10 per warrant divided by the warrant premium.

If the final basket level is less than or equal to the initial basket level, the warrants will expire worthless.

A source familiar with the structure said the call warrants are fundamentally similar to leveraged notes.

"It's just a matter of giving investors leverage," the source said.

The source noted that the prospectus for the product offers clues as to the pros and cons of the structure.

The prospectus says that the warrants "provide the opportunity to earn returns from possible increases in the level of the basket through a leveraged investment," but cautions that investors should accept the potential loss of some or all of their investment.

The source said the product targets the same investors as more typical note offerings.

"There's no difference," the source said. "It's just really product variety."

Lehman ties to commodity beta index

Lehman Brothers Holdings Inc. launched a series of 0% three-year Buffered Return Enhanced Notes tied to its relatively new Lehman Brothers Commodity Index Pure Beta Excess Return index.

If the index ends above its initial level, the payout at maturity will be par plus the product of the index return and the participation rate of 1 to 1.1 times. The participation rate will be set at pricing. Investors will lose 1% of their principal for every 1% that the index ends below the buffer level of 15%. Only 15% of the principal is protected.

The Pure Beta index was launched in October 2007. It is a rule-based index that provides exposure to the same 20 exchange-traded futures contracts on physical commodities that comprise the Lehman Brothers Commodity Index, but it is modified to mitigate distortions in the commodity markets associated with investment flows and supply disruptions.

It offers the potential to reduce negative "roll yield," which arises from the differential between the price levels of the futures contracts that an index rolls out of and those that it rolls into, Lehman said.

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