UBS' 2x leveraged E-Tracs on Alerian MLP Infrastructure: first MLP ETNs to offer leverage

By Emma Trincal

New York, July 8 - UBS AG, Jersey Branch became the first exchange-traded note issuer to offer leverage to investors seeking access to energy master limited partnerships with the launch on Wednesday of its 2x leveraged long exchange-traded access securities linked to the Alerian MLP Infrastructure index.

The notes began trading Wednesday on NYSE Arca under the ticker symbol "MLPL" and provide leveraged exposure to a portfolio of energy infrastructure MLPs.

"There are plenty of energy ETNs and energy [exchange-traded funds], but this is the first leveraged ETN on a MLP index," said Ron Rowland, founder and president of Capital Cities Asset Management.

UBS priced $100 million of 2x leveraged long E-Tracs due July 9, 2040 linked to the Alerian MLP Infrastructure index, according to a 424B2 filing with the Securities and Exchange Commission.

The issuer sold $10 million of the securities on Tuesday and will sell the remaining $90 million from time to time.

Leveraged income too

"The MLP space has been very attractive for investors from a yield standpoint. The leverage on that will attract even more investors," Rowland said.

One characteristic of the new product is that leverage is applied to both the final payout at maturity and the quarterly income distribution, according to a news release from index provider Alerian.

The current annual leveraged yield of the index is 12.85%.

"These notes are for investors very bullish on the prospects of MLPs in general, especially energy infrastructure MLPs," Christopher Yeagley, managing director and U.S. head of equity structured products at UBS, told Prospect News.

The 2x leveraged E-Tracs product comes on the heels of UBS' first Alerian MLP Infrastructure E-Tracs launched April 1. The original non-leveraged product was upsized last week by $100 million, bringing the total issue amount to $200 million, according to data compiled by Prospect News.

"UBS plans to continue to aggressively build out its ETN program," Yeagley told Prospect News.

He declined to specify which indexes and asset classes would be used for the upcoming products.

Hot MLP market

"Structured products linked to MLPs are a hot market at the moment," a market participant said.

Income and tax benefits are the main appeal of notes built on MLPs, several sources said.

"ETNs are a nice vehicle to deliver MLP exposure because distributions are not taxed at the entity level, which a fund would be. And since the notes trade on an exchange, you get an investment that gives you the liquidity of a stock and the tax benefit of a partnership," the market participant said.

Perhaps the main appeal of ETNs tied to MLP indexes is their potentially attractive income stream, the market participant said.

"The 2x leveraged E-Tracs will attract investors interested in receiving a leveraged income distribution," he noted.

Infrastructure vs. production

Another source of enhanced income comes from the underlying index itself.

The Alerian MLP Infrastructure index, a subset of the Alerian index, is comprised of 25 energy infrastructure MLPs focusing on energy transportation and storage.

Because the underlying companies are not directly involved in the exploration and production of energy but rather operate like toll-takers, the infrastructure subset index is a source of income that offers less correlation to commodities prices, sources said.

"Energy infrastructure provides the most stable cash flows in the MLP asset class," according to an FWP filed by UBS with the SEC.

Some risks

But the potential offered by the new product may also pose new risks and represent challenges to some investors, sources said.

Steve Doucette, financial adviser and vice president at Proctor Financial, said that the underlying index is not necessarily a well-known one and that complexity may be an issue.

"If you do your due diligence on the underlying, this product might be a neat way to get exposure to the energy infrastructure sector. But you would have to fully understand the risks and do some homework before even considering it," he said.

Another financial adviser said that some investors, lured by the yield, may not fully understand the product.

"My concern is that it may attract the wrong investor. Income investors look only at yields and ignore everything else," said Rowland.

"When they see a yield of almost 13%, perhaps they don't realize what an aggressive investment that is," he said, pointing to the fact that the two-times leverage factor applies to the index return whether negative or positive.

"My concern is that they may not understand the risk of leverage. They may get burned when the sector turns down," he added.

Growing market

Given the popularity of MLPs, which many view as a new asset class, UBS has several competitors in the rapidly growing MLP ETN market.

JPMorgan Chase & Co. established itself in this market a year prior to UBS. It offers the JPMorgan Alerian MLP index ETN due May 24, 2024 linked to the volume-weighted average price level of the Alerian MLP index. Launched in April 2009, the product now has a total issue size of $761.46 million, according to data compiled by Prospect News.

Other firms have also jumped on the MLP bandwagon, but they use another energy infrastructure index, the Cushing 30 MLP.

Credit Suisse AG, Nassau Branch has issued approximately $49.64 million since inception in April of its 0% ETNs due April 20, 2020 linked to the Cushing 30 MLP.

Royal Bank of Canada has priced approximately $15 million of direct investment notes due May 19, 2011 linked to the Cushing 30 MLP index.

UBS Securities LLC and UBS Financial Services Inc. are the underwriters of the 2x leveraged E-Tracs.

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.