UBS deal tied to Bloomberg commodity index leaves mouths watering; reverse convertible coupons drop

By LLuvia Mares and Sheri Kasprzak

New York, Nov. 29 - Some structures are just more desirable than others, according to one market observer. And UBS AG's zero-coupon, principal-protected notes linked to the UBS Bloomberg Constant Maturity Commodity Index - Excess Return happens to be high on that list.

The deal combines the current enthusiasm for commodities with a relatively new index that offers an appealing payoff to investors.

"I think it's a very innovative index," said a market observer. "It has been in the works for about a year and a half now and it's great to see some products coming out on it."

The index consists of 28 futures contracts with up to five different maturities for each individual commodity.

"It's a conservative play in commodities with a 100% protection and 100% upside. These are the kinds of good pay-off profiles that you are seeing in the commodities space given the economics right now in commodities," he said.

The three-year notes pay par plus any gain on the index multiplied by a participation rate that will be determined at pricing and is expected to be 100%. Investors will receive at least par.

The notes are expected to price on Dec. 21.

On Nov. 21, UBS priced two notes with a similar structure, one of them $2.61 million issue of zero-coupon 100% principal-protected notes due Nov. 29, 2011 linked to the UBS Bloomberg Constant Maturity Commodity Index - Excess Return with a payout at maturity of par plus any index gain and a floor of par. The other was $1.68 million of similar notes but with a May 27, 2011 maturity.

Reverse convertibles get revamped

Elsewhere, as the stock market moves this way and that, some reverse convertibles are getting overhauled and the stock market is absolutely the culprit, one market source said.

"The short answer is yes, the stock market does have an impact on reverse convertibles though I will add that it really does depend on the particular reference stock because some stocks are going to be more volatile than others," the market observer said.

"When you've got high volatility, you get higher coupons. When you've got low volatility, you get lower coupons."

On Thursday, JPMorgan Chase & Co. lowered the coupon on its 10.25% reverse convertibles linked to General Motors Corp. to 10%.

Earlier this week, HSBC USA Inc. cut to 14.3% its 17.5% reverse convertibles linked to the stock of Lehman Brothers Holdings Inc. and reduced to 16.7% the 20% reverse convertibles linked to Target Corp.

Deutsche plans Nikkei notes with quintuple payout

In other news Thursday, Deutsche Bank AG, London Branch intends to price return optimization securities linked to the Nikkei 225 index with five times upside participation.

The 18-month notes pay par plus five times any positive return on the index, up a maximum gain between 13.35% and 13.75%, with the exact cap to be set at pricing. The pricing date is expected to be Dec. 21.

UBS Financial Services and Deutsche Bank Securities Inc. are the agents.

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