New trends to watch for; Lehman sells $10 million of pyramid notes; UBS sells $9.8 million gold, currency notes

By LLuvia Mares

New York, Sept. 28 - The structured products sector has been active all week, with deal announcements continuing to inundate the market Friday. Market sources said investors should be on the look out for the more interesting trends hitting structured products.

"The trends that you are seeing right now - there are two trends - are the three-times upside on index baskets, which are getting more prevalent after the success of the Merrill Lynch deal, so that's a trend that I think you'll continue to see as long as you have the value that it can deliver on the cap," said Keith Styrcula, Structured Products Association chairman.

"You will also see the phenomenon of this play between currencies and commodities. It shows very compelling return profiles in the form of notes, forward thinking investors should be considering these types of investments, seriously for their portfolios."

Merrill Lynch & Co. priced a series of offerings in late August with a three-times multiplier. While several were substantial in size, the biggest by far was linked to the S&P 500 index and came in at $516 million. It had an 18.87% cap and a floor of par.

Lehman sells $10 million notes linked to copper, euro

As an example of the second trend, Lehman Brothers Holdings Inc. priced a $10 million issue of 0% pyramid notes due Jan.7, 2008 linked to the spot prices of grade A copper and the euro, according to an FWP filing with the Securities and Exchange Commission.

"It sounds like a short-term research oriented bet that is some sort of play between the euro and copper," said a market analyst.

"It sounds like it's for sophisticated investors only and can very well be a reverse inquiry given the smaller size and given the nature of the trade."

If the final prices for copper and the euro are greater than the upper boundaries, the discount factor for each asset will be the percentage by which the final price exceeds the upper boundary. If the final prices for copper and the euro are lower than the lower boundaries, the discount factor for each asset will be the percentage by which the final price is below the lower boundary. If the final price is between the two boundaries, the discount factor will be zero.

At maturity, the payout will be par times 102.41% minus the discount factors for copper and the euro. Investors will lose part of their investment if the discount factor is greater than 2.41%.

The copper upper and lower boundaries are $9,774.00 and $6,516.00, respectively. The euro upper and lower boundaries are $1.475 and $1.335, respectively.

Lehman Brothers Inc. is the agent.

UBS sells notes linked to gold, currencies

UBS AG priced a $9.8 million issue of zero-coupon principal-protected notes due Sept. 28, 2009 linked to a gold and currency basket, according to a 424B2 filing with the Securities and Exchange Commission.

"It's a great trade playing off the volatility in both those markets, so investors have two opportunities to win up to 137%," said a market specialist. "So the most you can make is a one-year principal protected bet that gives you up to 37% of the upside and you have two chances to win."

The basket comprises the equally weighted spot exchange rates relative to the dollar of one troy ounce of 0.995 gold, the Malaysian ringgit, the Indonesian rupiah, the Indian rupee and the Philippine peso.

At maturity, the payout will be par plus 137% of any gain on the basket if the final basket level is greater than or equal to its initial level. If the basket declines, investors will receive par.

UBS Financial Services Inc. and UBS Investment Bank are the underwriters.

Lehman prices triple-upside notes

In an example of notes with a triple upside, Lehman Brothers priced $16.8 million of 0% return optimization securities due March 31, 2009 linked to a basket of indexes, according to a 424B2 filing with the Securities and Exchange Commission.

"It's one of those accelerated return notes, less is more sometimes in these things but you can't beat the acceleration on the upside for a one year product to have the opportunity to triple your gains up to 29.7%," said a market observer.

"If you get a 10 % return on that basket you get up to almost 30% at the end of the year, that's a terrific value proposition for equity investors."

The basket includes the Dow Jones Euro Stoxx 50 index with a 35% weight; the FTSE 100 and Nikkei 225 indexes, each with a 25% weight; and the Swiss Market, S&P/ASX 200 and MSCI Emerging Markets indexes, each with a 5% weight.

The payout at maturity will be par of $10 plus triple any basket gain, subject to a maximum return of 29.7%. Investors will be fully exposed to any index decline.

UBS Financial Services Inc. and Lehman Brothers Inc. are the underwriters.

Lehman prices inked to three indexes

In a separate deal, Lehman Brothers priced $21.8 million of 0% performance securities with partial protection due Sept. 30, 2010 linked to a basket of indexes, according to a 424B2 filing with the Securities and Exchange Commission.

The basket includes the S&P 500 index with a 33.34% weight, the Dow Jones Euro Stoxx 50 index with a 33.33% weight and the Nikkei 225 index with a 33.33% weight.

The payout at maturity will be par of $10 plus 115.3% of any basket gain. Investors will receive par if the basket declines by 20% or less and will lose 1% for each 1% decline beyond 20%.

UBS Financial Services Inc. and Lehman Brothers Inc. are the underwriters.

AIG prices $4.32 million Libor notes

American International Group, Inc. priced a $4.32 million issue of Libor range notes due Sept. 28, 2022 via Banc of America Securities LLC, according to a 424B2 filing with the Securities and Exchange Commission.

"Range notes can be complicated but they are coming back into favor in a big way, in the fixed income markets and the interest rate environment," said a market insider.

"You have to look carefully at that investment and it sounds like it's a fairly good value proposition to out perform the fixed income markets, but there is a lot of volatility in the trading range right now.

"Investors should be cautious and certain that it fits in with their investment objectives before investing."

The interest rate will be reset quarterly. The interest rate will be equal to a base rate times the proportion of days on which the three-month Libor is at least zero and less than an upper barrier.

The base rate will be 7% from issuance to Sept. 28, 2009, 8% from then until Sept. 28, 2011 and 9% thereafter.

The upper barrier will be 6.75% until Sept. 28, 2011 and 7% thereafter.

Interest is payable quarterly.

The notes are callable at par on any interest payment date beginning Dec. 28, 2007.

If the notes are not called, the payout will be par plus accrued interest.

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