UBS’ $5.96 million trigger autocall notes provide high income, deep protection on growth stocks

By Emma Trincal

New York, Dec. 2 – UBS AG, London Branch’s $5.96 million of trigger autocallable contingent yield notes due Dec. 4, 2025 linked to the least performing of three growth stocks offer a competitive yield with a low barrier, two features which advisers found attractive.

The underlying stocks are Apple Inc., Amazon.com, Inc. and Tesla, Inc., according to a 424B2 filing with the Securities and Exchange Commission.

The notes will pay a contingent monthly coupon at the rate of 19% per year if each stock closes at or above its coupon barrier, 50% of its initial level, on the corresponding observation date.

The notes will be automatically called at par plus the coupon if the shares of each stock close at or above their initial level on any observation date after three months.

If the notes are not called and the worst performer finishes at or above its downside threshold level, 50% of the initial share price, 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 its initial level.

Riding the bear

“You collect the coupon as long as it doesn’t go down more than half. That’s a solid barrier. If you miss a few coupons during a bear market, you might still collect some over four years,” said Steve Doucette, financial adviser with Proctor Financial.

“The coupon is so attractive. It’s amazing they were able to structure it with this deep barrier.”

Despite the bullish performance of the stocks and earnings growth of the three companies, the deal was by nature speculative, he said, by virtue of the worst-of and the use of single stocks versus indexes.

“Among the three horsemen, my biggest concern would be Tesla. Everybody is coming up with electric vehicles. Right now, Tesla is king in this game. But we’ll see if they can hold it.

“19% is a heck of a coupon and you get a 50% protection. Even if you’re stuck in this for four years, which is unlikely, the chances of losing money at maturity are slim unless [Elon] Musk blows up Tesla.

“It’s an interesting note,” he said.

Musk, the richest man in the world, is the founder and chief executive officer of Tesla and SpaceX, a rocket and spacecraft manufacturing company.

Relatively safe

The deal priced on Monday as the market bounced back from a Black Friday sell-off spurred by concerns over the new Covid-19 variant Omicron. The three stocks closed Thursday’s session below their Monday levels. Tesla for instance was down 5.25% from its initial level.

“I wouldn’t put too much on it,” he said.

“You’re looking at the past few days. We’re in a very volatile market right now with the new variant.”

Overall, Doucette said he liked the notes.

“I might buy some of it for myself. In clients’ portfolios we like broad-based indices.”

“The barrier is so low, it’s a pretty safe way to earn a double-digit return. You ride it out over four years and collect the 19% until you get called.

“Even if it drops 40% you still collect. That’s pretty neat,” he said.

Growth stocks

Matt Medeiros, president and CEO of the Institute for Wealth Management, said he also liked the terms despite the current valuations of the underliers.

“Even with the recent pullback, these stocks are trading at very high values,” he said.

Tesla’s share price has more than doubled from its 52-week low of March while Apple and Amazon have seen their price surge 41% and 19%, respectively, from their 52-week lows in March.

“At the same time, these stocks have maintained consistency of performance for a number of years. So, the 50% barrier in this product is sufficient.

“Both the barrier and the coupon are well set for these securities given that type of structure,” he said.

Equity allocation

Given the size of the coupon, the early redemption scenario would not be a bad outcome.

“My assumption is that the note will be called within six months. So, you could earn between 4.75% and 9.5% in three or six months. That’s pretty good,” he said.

Medeiros said he “is not a fan” of worst-of structures. But the terms of the deal warranted the risk. He questioned however the inclusion of Tesla in the mix.

“Putting Apple, Amazon and Microsoft together would make more sense,” he said.

“They probably picked Tesla to add some correlation risk. It’s also more volatile than the other two. I guess they needed to extract more premium.”

At 78%, the implied volatility of Tesla is indeed much greater compared to Amazon and Apple, which show implied volatilities of 34.66% and 33.14%, respectively.

“Because of that and because it’s a worst-of on three stocks, I would put it in my equity bucket. Even though it’s an income note, the risk needs to be properly allocated,” he said.

UBS Securities LLC and UBS Investment Bank are the agents.

The notes will settle on Friday.

The Cusip number is 90279DRD0.

The fee is 1%.

© 2015 Prospect News.
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