UBS’ $1.34 million step-down trigger autocall on Stoxx, Nikkei show ‘fair’ risk-return profile

By Emma Trincal

New York, Nov. 16 – UBS AG, London Branch priced $1.34 million of 0% step-down trigger autocallable notes due Nov. 16, 2022 linked to the lesser performing of the Euro Stoxx 50 index and the Nikkei 225 index, according to a 424B2 filing with the Securities and Exchange Commission.

The notes will be called at par of $10 plus an annual call premium of 9.6% if each index closes at or above its initial level on any annual observation date.

The payout at maturity will be par plus 48% unless either index finishes below its 70% downside threshold, in which case investors will lose 1% for each 1% decline of the worse-performing index.

Picking the worst

The Euro Stoxx 50 index should be considered as the likely worst-performing index, a market participant said, adding that the Nikkei 225 index should be above its initial level on the first annual call date.

The duration of the notes should not exceed one year as he predicted the call will occur on the first observation date.

“Forget about the Nikkei. I’m looking at the Euro Stoxx 50 chart to see if you’ll still be in the paper,” he said.

The index was at a high in the spring of 2015 then dropped 28% to its lowest low about a year later. Two weeks ago, the European benchmark hit a recent new high.

Locking in gains

“It looks like they will kick you out of the notes in 2018,” he said.

“The sharp downturn that affected the European market from April of 2015 until February of last year appears to be over. The recovery seems to be in place and we just hit a fresh high in early November that’s just 3% below the five-year high.

“Chances are the notes will be called a year from now.

“You lose the paper and you make almost 10%.”

Investors should be “happy” with that outcome, given the strong rally seen in this market, he said.

“There are still a lot of headwinds in Europe between Brexit and Italy.

“This way your profit is locked in. It’s a little bit safer,” he said.

Special situation

Matt Medeiros, president and chief executive of the Institute for Wealth Management, said the notes offered an interesting balance between risk and reward.

“I’m usually not a big fan of worst-of, but I can understand where firms are coming from with this kind of product because volatility has been so low for so long,” he said.

Worst-of deals introduce correlation risk to add more premium. Worst-of notes have flooded the market this year because selling volatility alone as it has been done so far with traditional reverse convertibles linked to a single asset has failed to make coupons attractive enough to be marketed to customers in this low volatility environment, sellsiders said.

Different pair

The choice of underlying for this deal was different from the usual index pairs, such as S&P 500/Russell 2000 or Euro Stoxx 50/S&P 500, he noted.

“It’s rare to see the Japanese market. It seems like the issuer had some kind of specific situation, perhaps a reverse inquiry from an investor,” he added.

Medeiros, who is optimistic about international equity, in particular Europe, said that the notes would probably not reach maturity.

“There is a high probability that this will be called after one year, perhaps two. The return is decent for that period of time,” he said.

Step down

Investors accumulate the call premium, which benefits investors, he noted.

If the notes are called on the second observation date, they will collect 19.2%, and on the third, 28.8% up to the fourth observation, which will lead to a 38.4% premium.

The call premium accumulates and grows to a maximum of 48% on the last observation date. While the last call is the less probable, it provides investors with the “step down.” This term suggests that the last call threshold at 70% is the lowest compared to the previous four, according to the prospectus.

The step down was “a good thing” for investors, he noted.

“If you’re wrong, if you haven’t been called, the attractive part of this deal is that you can still collect 48% even if the indices are down.

“That makes it look a little bit like an absolute return note. As long as the barrier isn’t breached, you end up getting paid.”

Mildly bullish bet

The greater “risk” for this adviser was on the upside.

“There’s a high probability that you will get called early,” he said.

“There’s also a high probability that the indices could outperform the callable rate.

“That would be something I would be concerned with.”

Aside from that, for investors who are not exceedingly bullish, the notes offer a “fair” risk-adjusted return with the risk tampered by the occurrence of the call and the step down at maturity while the return approaches the double-digit level and can be had on five occasions.

“It’s not a bad deal,” he said.

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

The notes (Cusip: 90280X646) priced on Nov. 10.

The fee is 2.5%.

© 2015 Prospect News.
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