UBS’ $32.32 million income notes on indexes reintroduce the old ‘high/low’ structure

By Emma Trincal

New York, June 14 – UBS AG, London Branch’s $32.32 million of airbag yield notes due Dec. 13, 2023 linked to the least performing of the Dow Jones industrial average, the Russell 2000 index and the S&P 500 index revive a type of note not seen in several years, known as “high/low” yield notes.

UBS in its recent offering offers a variable interest, which is payable on Sept. 13, 2023 and on the final valuation date, according to a 424B2 filing with the Securities and Exchange Commission.

If each index is greater than or equal to its initial level on the observation date, investors will receive the maximum coupon rate of 7.75% per annum. Otherwise, a minimum coupon rate of 4.5% per annum will be paid.

If the final level of each index is greater than or equal to 70% of its initial level, the payout at maturity will be par plus the last coupon payment, if applicable. Otherwise, investors will lose 1.4286% for every 1% decline beyond 30%.

Variety of coupons

“It’s different. It’s shorter. If you have a very short-term conviction, it makes sense. And it’s not complicated,” said Brady Beals director, sales and product origination at Luma Financial Technologies.

“I always wonder why we don’t see more variance on coupons. It’s always binary. Either I get my coupon, or I get nothing. Income notes have one threshold only for one kind of payout.”

But issuers can always innovate and price deals differently, he added.

“And it’s not like it has never been done in the past,” he said.

High/low notes, CDs

Back until 2017, Credit Suisse AG, London Branch was the almost exclusive issuer of “high/low coupon callable yield notes.” The notes, which were linked to several underlying, paid a higher coupon if each underlying closed above a barrier level.

Otherwise, the coupon rate dropped to a lower level. Credit Suisse had been selling those products since 2010, according to data compiled by Prospect News.

The Swiss bank collapsed in March. Its acquisition by UBS was completed on Monday.

A similar technique has also been used in the past in the certificate of deposit space, Beals said.

Investors would get a specific rate if for instance seven out of 10 underlying stocks were at or above the barrier level, he explained. If eight of them met the barrier condition, the coupon would increase. The greater the number of underlying stocks at or above the barrier, the higher the coupon up to a cap.

More options

“Investors like the idea of having a minimum coupon regardless of volatility. You get the minimum return or a higher return depending the number of underliers closing above the threshold,” he said.

“Notes like this one should be more popular. It might become a trend again.”

On the fixed-income space, Treasury rates are now competing with callable notes by providing high coupon rates, he noted.

The six-month T bill for instance yields 5.36%.

“Notes with two tiers of coupons may not be comparable to Treasuries. But at least they provide something as opposed to the binary all-or-nothing income notes being sold today,” he said.

Even if an autocallable may offer an 8% or 9% contingent coupon, such yield may not be as compelling as a 5.5% “risk-free” short-term Treasury from a risk-adjusted return standpoint, he said.

“I think offering a set of different coupons in one note may offer some sort of middle ground,” he said.

“It’s going to be more appealing.”

Too much risk

A fixed-income trader had a negative view on the notes.

“Why in the world would anybody do something like that? I can get a six-month Treasury with no risk at all. It makes zero sense,” he said.

“I guess beauty is in the eye of the beholder. Maybe this is for someone who has a short-term view on the market. They think rates will drop. The hope is to get the 7.75% coupon. They don’t see the risk.”

But for this trader, there was “plenty of risk,” in this product.

“I don’t see the risk-reward. Any trade you do, you go ahead and take the risk only if you think your return will be substantial.

“But here, you get at best 7.75% and worst-case scenario, 4.5% which is less than a short-term Treasury.

“Not to mention the market risk at maturity. You have the worst-of exposure to three indices, and you could also lose your entire principal.

“It’s risk upon risk upon risk.

“I don’t see the point,” the trader said.

UBS Securities LLC and UBS Investment Bank are the underwriters.

The notes will settle on Thursday.

The Cusip number is 90279GNE5.

The fee is 0.2%.

© 2015 Prospect News.
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