UBS’s 10.15% geared buffered income autocalls on JPMorgan offer neutral, mildly bullish bet

By Emma Trincal

New York, July 23 – UBS AG London Branch’s 10.15% buffered income autocallable securities with downside leverage due July 27, 2021 linked to the common stock of JPMorgan Chase & Co. provide investors with a moderately bullish view on the stock and a chance to collect a double-digit, guaranteed coupon, sources said.

In addition, the monthly autocall and buffered protection at maturity mitigate some of the downside risk.

Interest is paid monthly, according to a 424B2 filing with the Securities and Exchange Commission.

The notes will be called at par if the shares close at or above the initial price on any monthly call observation date.

Investors will receive par at maturity if the stock falls by up to 20% and will lose 1.25% per 1% drop beyond 20%.

Company risk

“You take the single-stock risk, that’s my biggest concern,” said Steve Doucette, financial adviser at Proctor Financial.

“If things get ugly, where is the stock going if it’s not going up?”

While exposure to a single underlying is less risky than to a “worst of,” at least from the standpoint of low or negative correlations, Doucette said he would be more comfortable having more diversification in his exposure even via a worst-of.

“I don’t like being exposed to company risk. I’d be better off with a worst-of on indexes or on a bunch of ETFs in the same sector,” he said.

Bank ETFs

Recently, he was shown a two-year worst-of tied to three bank ETFs with an issuer call. The 11.25% contingent coupon was based on a 55% coupon barrier. The barrier at maturity was set at 45%.

“The coupon is not that much higher, one percentage point, but I’m more comfortable betting on three ETFs than one stock,” he said.

“And the 45% barrier is neat.”

Mildly bullish

An important difference between the two deals he admitted, was the existence of a hard buffer (for the UBS product) versus a barrier with the worst-of. The one-year term on the UBS note was also twice shorter.

“It’s not a bad note. Especially with the 20% buffer. You can outperform significantly with that,” he said.

The 1.25 downside multiple was not a concern for this adviser.

“I don’t shy away from using those geared buffers. To lose 100% of your principal, the stock would have to go all the way down. Meanwhile you get much better terms. It’s a good tradeoff.”

For investors with a mildly bullish view on JPMorgan, the notes offered an attractive coupon.

“JPMorgan is one of the better banks. If you want to get exposure to that stock, that’s a nice return.

“It all depends on whether you are comfortable betting on one single stock or not. I kind of stay away from that. Even with JPMorgan...you never know what can happen to a company.”

Monthly calls

A market participant said the notes were reasonably priced.

“You get a 10.25% fixed coupon, which is not bad,” he said.

He analyzed the mechanisms, which allowed the bank to generate this type of return.

The monthly autocall was not a source of premium.

“If anything, it helps the client. I get called, I’m out. It’s a win for me. The call is not going to enhance your coupon. It should lower it, all things being equal.

“This is why reverse convertibles tend to pay higher yields. They’re short, they’re built on highly volatile stocks and they don’t get called.”

Volatility

What allowed the issuer to offer a double-digit coupon on a guaranteed basis along with a buffer was the volatility of the underlying, he said.

“Volatility is the name of the game. They needed some volatility. A single stock will give you that,” he said.

“It’s not a Tesla. But it’s not the S&P 500 either. So, you have more room to play with,” he said.

The volatility of JPMorgan stock is in the “30’s” across strikes, he noted. In comparison, the S&P 500 index is in the “low 20’s.” A momentum stock like Facebook has a volatility of 43% and Amazon, at above 50%.

“So yes, JPMorgan is a financial stock and of course, it’s not as volatile as a FANG, but if you compare it to the S&P, it’s a lot more volatile.”

The acronym “FANG” stands for “Facebook, Amazon, Netflix and Alphabet, Google’s parent company.

Those high-growth momentum stocks are highly volatile as they can see their price move fast and widely.

Dividends, term, gearing

Other factors helped pricing, but to a lower extent.

The main one was the high-dividend yield of the underlying. JPMorgan pays a 3.65% dividend yield to its shareholders. The yield is not paid to the noteholders directly but used to finance the packaging of the embedded options.

A second element was the short tenor, he noted.

“Short term, you get more premium per annum than with a longer-term note,” he said.

Leveraging the buffer also gave the issuer more leeway, but in a marginal way.

“Putting a geared buffer is what I would call structuring efficiency. It helps but it’s not what is going to give this coupon. It’s just one element.”

The notes are “fairly” priced, he concluded.

“If you’re neutral on JPMorgan, if you don’t think it’s going to go down, it’s a reasonable play.”

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

The notes will settle on July 27.

The Cusip number is 90276BFB4.

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