UBS' $19.44 million phoenix autocallable optimization notes on Ford feature contingent coupon

By Emma Trincal

New York, Feb. 14 - UBS AG, London Branch's $19.44 million of phoenix autocallable optimization securities due Feb. 15, 2012 linked to the common stock of Ford Motor Co. are for bullish investors who do not anticipate a big drop in the price of the stock as the interest payments are contingent upon the direction of the stock, sources said.

If Ford stock closes at or above the trigger price - 75% of the initial share price - on a quarterly observation date, the issuer will pay a contingent coupon that quarter at the rate of 12.25% per year, according to a 424B2 filing with the Securities and Exchange Commission. If not, no coupon is paid for the quarter.

This contingent payment feature makes this autocallable structure slightly different than most autocallables, which tend to pay the coupon regardless of the stock price, sources noted.

If Ford stock closes at or above the initial share price on any quarterly observation date, the notes will be called at par of $10 plus the contingent coupon.

If the notes are not called and the stock finishes at or above 75% of the initial price, the payout at maturity will be par. Otherwise, the payout will be par plus the stock return.

Bullish call

For Carl Kunhardt, director of investment management and research at Quest Capital Management, who is bullish on the stock, the contingent coupon payment scenario is not really a concern because the notes are likely to be called.

"The analyst consensus on Ford sees muted growth. You're not going to own this for more than a quarter," Kunhardt said.

He said that the stock traded "flat from 2006 to May 2008" then "fell off a cliff until February 2009" and since then has been up.

"Chances are you'll get called and early on. Sure there's reinvestment risk, but that wouldn't bother me. There isn't that much that can give you 3% in a quarter," he said.

"As a short-term play, I would consider it."

Kunhardt said that he liked the feature in the structure that allows investors to earn the coupon as long as the stock price is above the trigger price.

"I'd love to see the stock go down 5% and then stay flat. As long as it doesn't go up above the initial price, I just keep clipping the coupon. That to me would be the ideal scenario. The danger, of course, is if it goes below 25%," he said.

"It seems like an overcomplicated way to get 3%. But 12.25% annualized, that's an equity-like return."

Solid offering

Michael Kalscheur, financial adviser at Castle Wealth Advisors, said that he liked the product for a variety of reasons.

"It's a good solid offering," he said.

"Ford is a good stock to own. ... The implied volatility of Ford in 2008-09 was atypical. Everybody thought that the company was going to go bankrupt. Now you have an implied volatility that's much less than the historical volatility, which is great.

"I'm all about the risk. UBS isn't in the top tier, but it's very high. I'm comfortable.

"I'm a downside protection kind of guy, and you've got that. If the stock doesn't drop by more than 25%, you get your principal back. I like that."

Kalscheur said that the only disappointing aspect of the deal was the 1.5% fee.

"It's a little rich, but it's not a deal breaker," he said.

Being called sooner

Commenting on the two different scenarios involving the payment of the coupon - the payment of the contingent coupon applicable to the observation date or an automatic call - Kalscheur said that his preference was the automatic call.

"I'd much rather be called sooner than later so that I can redeploy my capital into something else," he said.

"Of course, the ideal scenario is that your stock is down on day one, stays down for a while but never declines by more than 25%. You get your full coupon and par at maturity. You never have to do anything.

"But if I get taken out, it would be just fine. I collect my interest, and if something bad happens to Ford, I'm not getting busted."

UBS priced three other phoenix autocallable optimization securities offerings with the same maturity date and the same structure: $11.53 million of notes linked to Silver Wheaton Corp. common stock, $7.39 million of notes tied to the American Depositary Shares of Barclays plc and $2.02 million of notes linked to the ADSs of Rio Tinto plc.

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

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