UBS’ contingent income autocallables on FedEx, Delta show double-digit coupon, low barrier

By Emma Trincal

New York, Dec. 3 – UBS AG, London Branch’s contingent income autocallable securities due March 3, 2022 linked to the common stocks of Delta Air Lines, Inc. and FedEx Corp., pay a high coupon and offer a deep protective barrier. But the worst-of payout based on two stocks rather than indexes do not eliminate the risk, advisers said.

If the least performing shares close at or above the coupon barrier, 70% of the initial share price, on a quarterly determination date, the notes will pay a contingent payment that quarter at an annualized rate of 12.45%, according to a 424B2 filing with the Securities and Exchange Commission.

The notes will be called at par of $10 plus the contingent coupon if the least performing shares close at or above the initial share price on any quarterly determination date other than the final determination date.

If the final share price of the least performing stock is greater than or equal to the downside threshold level, 55% of the initial level, the payout at maturity will be par. Otherwise, investors will lose 1% for every 1% that the final share price of the least performing stock is less than the initial share price.

Air and ground

“Both companies are in transportation. You would think there’s a decent correlation between the two,” said Tom Balcom, founder of 1650 Wealth Management.

The one-year coefficient of correlation between the two stocks is 0.64. A three-year chart showed both stocks moving in synch in the first two years but the correlation began to break a year ago.

In early August, FedEx ended its ground-delivery contract with Amazon, noted Balcom. The news pushed the share price down 7% for that month. The stock has declined by nearly 30% over the past year.

Delta Airlines on the other hand has only lost 2.5% during that time.

Blue-chip

“Despite these ups and downs you’re talking about well-established companies,” he said.

“Usually in order to get a 12.5% yield, you’d have to use a volatile company... names like Tesla. With this note, we’re talking about blue chip stocks, companies everybody knows. Not a biotechnology or tech name. Investors are more likely to be comfortable with those names.”

Both the structure and the underliers added a dimension of safety to the product, he noted.

“We normally don’t buy notes on stocks. But given the names they’re using and the very low downside threshold, I would be more likely to consider this deal,” he said.

Potential losses

Donald McCoy, financial adviser at Planners Financial Services, said that the first question coming to mind when considering the notes should be: “how likely it is that FedEx or Delta would lose 45% in a little bit over two years?”

The odds were small, he said.

“But we’re also in a period of highly valued equities. If we had some kind of recession, you can’t just rule out the possibility,” he said.

A bit complicated

Clients tend to like simplicity. The autocallable contingent coupon product tied to the worst of two assets is not very straightforward, he added.

“One of the concerns that I have is that there are a lot of rules to it. If they’re both above the initial price you get called. If not, you don’t, but as long as none of them drops more than 30% you get paid. If nothing drops more than 45% at maturity you get your money back. If the two stocks are positive, you get your last coupon. That’s a lot of moving parts,” he said.

Call risk

The reward was significant though: a near 12.5% annual rate of return was compelling both for income and capital appreciation investors.

“Obviously you get paid very well. But the problem is there’s a high likelihood that three months later, you’ll be shopping around for another instrument. The high probability of getting cashed out early on is one of the reasons you get such a high yield,” he said.

This may represent an inconvenience for advisers and clients alike.

“It may be easier if you use those autocalls on a regular basis via for instance some kind of laddered portfolio. But you still have to go back to the client and get them to agree on another deal with different stocks and different terms,” he said.

Despite the low barrier, investors were still exposed to market risk.

“You’re dependent on two stocks not to be down more than 45%. It’s a ton of money to be down, but the risk is still there. You’re looking at two potentially overvalued stocks, whose performance by the way depends on fuel price. This is a little bit of a wildcard.”

UBS Securities LLC is the agent. Morgan Stanley Wealth Management is the dealer.

The notes will settle on Wednesday.

The Cusip number is 90281F420.

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