UBS, Morgan Stanley launch accelerated products linked to financials; beaten-down sectors draw attention

By Kenneth Lim

Boston, April 3 - Beaten-down sectors continued to attract interest from issuers and investors hoping to benefit from the spike in volatility.

"Like many other things, and especially in financial markets, something becomes interesting only when it starts to move, and the more it moves the more interesting it gets," a structurer said.

UBS AG on Thursday launched a series of 0% return optimization securities with partial protection due April 20, 2010 linked to the S&P Financials index.

At maturity, those notes will pay par of $10 plus double the underlying index return if the index ends higher than its initial level, subject to a maximum payout yield of 27% to 31%. The cap will be determined at pricing.

If the underlying index is flat or ends lower by up to 20%, investors will receive par. If the underlying index ends lower by more than 20%, investors will lose 1% of the principal for every 1% decline beyond 20%.

Pricing is expected on April 15, 2008.

The securities "are designed to enhance index returns in a moderate-return environment - meaning an environment in which stocks generally experience moderate appreciation," UBS said in the product prospectus.

Morgan Stanley is offering a series of 0% Performance Leveraged Upside Securities (PLUS) due April 2010 linked to shares of the Financial Select SPDR fund.

Those notes will pay par of $10 plus 2.5 times any increase in the underlying at maturity, subject to a maximum payout of $14.50 to $15.50, or a total return of 45% to 55%. The exact amount will be set at pricing.

Investors will lose 1% for every 1% decline in the underlying share price.

Those offerings came just after JPMorgan Chase & Co. said earlier in the week that it plans to offer 0% buffered return enhanced notes due April 8, 2010 linked to a basket of real estate and financial exchange-traded funds.

The basket consists of the iShares Dow Jones U.S. Real Estate Index Fund with a 60% weight, the S&P Homebuilders ETF with a 20% weight and the Financial Select Sector Fund with a 20% weight.

The payout at maturity will be par times double any increase in the basket, subject to a maximum payout on the notes of no less than 42%. The exact cap will be determined at pricing.

Investors will receive par if the basket declines by 15% or less and will lose 1% for each 1% decline beyond 15%.

The notes are expected to price April 2 and settle April 7.

"Real estate and financial names have all taken a hit over the past year, and a lot of investors are wondering when it will hit bottom," the structurer said. "So there's a lot of opportunities for structured products to come in and offer these investors a chance to take a position on these sectors."

The structurer said the increase in volatility allows issuers to be more generous with the terms.

"Because volatility is up, if you're talking about a bullish kind of product, the issuer can afford to give more in terms of maybe the protection level or the redemption amount or the interest payments to compensate the investor for the risk," the structurer said. "Investors who can accept the risk can hunt for better returns even in a weak market."

Investors who think that the underlying sectors are not going to do much worst in the months ahead are likely to seek such products, the structurer said.

"These products are for investors who are roughly neutral on the real estate and financial sectors," the structurer said. "They've got partial principal protection, so you would still come out ahead [of the underlying] if it goes down a little or if it goes up by a bit. You stand to lose if the underlying falls by a lot, more than your protection level, or if it increases by a lot, or more than the cap."

"There's that sweet zone around the middle where the buyer of the product stands to make money, but he loses out if it goes either above or below that zone," the structurer said.

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