UBS’ capped leveraged buffered notes linked to MSCI EAFE index offer short tenor, high value

By Emma Trincal

New York, June 3 – UBS AG, London Branch’s 0% capped leveraged buffered notes linked to the MSCI EAFE index offer good pricing for short-term investors who are mildly bullish on non-U.S. developed markets, said Tim Vile, structured products analyst at Future Value Consultants.

The tenor of the notes is expected to be 19 to 21 months and will be set at pricing, according to a 424B2 filing with the Securities and Exchange Commission.

For the purpose of rating the product, Vile picked 19 months as the hypothetical maturity.

If the index return is positive, the payout at maturity will be par plus 1.5 times the index return, subject to a cap of 12.5% to 14.7%, which will be set at pricing. In his report, Vile chose the midpoint of the range, or 13.6%.

Investors will receive par if the index declines by 15% or less and will lose 1.1765% for every 1% that the index declines beyond 15%.

Future Value Consultants evaluates risk, return and price using several proprietary scores in order to compare a product with others.

The comparisons are made in two ways: with all products and with the same product type. In this case, the notes belong to the leveraged return product type, defined as products with an upside participation in excess of 100%.

Value score

One of the key ratings is the price score, which measures value.

This rating measures the value offered to the investor on a scale of zero to10. The fees are divided by the tenor to generate an annualized cost. The higher the score, the lower the fees.

“This typically gives an advantage to longer-dated products. The fact that a 1.6-year has such a high price score shows that the issuer spent a fair amount of money on options that are valuable to investors,” Vile said.

The price score is 8.44 versus an average of 6.98 for similar products, according to the research report produced by Future Value Consultants.

“To get such a high score on a short-term product is pretty unusual. That’s because you get a 15% buffer, some good leverage and a decent cap. Those are all attractive terms,” he said.

Based on Vile’s assumptions – a 19-month note with a 13.6% cap – investors can earn up to 8% per annum on a compounded basis. It would only take the index a 5.37% annual growth to enable investors to hit the cap, he said.

The geared buffer puts investors at a greater risk than a traditional one since they have the full downside market risk, the prospectus said.

“You can indeed lose 100% of your capital because you lose a lot quicker, even though you would need to see a significant drop in the index,” he said.

“So this is not a regular buffer. But there is a premium to compensate you for this extra risk. Chances are it was used to increase the size of the buffer and perhaps the cap as well,” he said.

The 1.5 times leverage was also valuable, he added.

Risk

Future Value Consultants assesses risk using its proprietary riskmap. The score measures the risk on a scale of zero to 10 with 10 as the highest level of risk possible. This measure of risk is the sum of two riskmap components, market risk and credit risk, both calculated on the same scale.

The market riskmap is 1.42, which is considerably lower than the 5.78 average for leveraged return notes.

“The market riskmap is really below the average for same products. The buffer definitely helps,” he said.

Investors in the notes seek exposure to the EAFE index, which tracks the equity performance of developed markets in Europe, Asia, Australia and the Far East.

“The EAFE is not the most volatile underlying. It’s a bit more volatile than the S&P but not by a whole lot,” he said.

The notes have a 0.54 credit riskmap versus an average of 0.47 for the product type, according to the report.

“With credit riskmap, the short tenor should help. Yet we have a higher level of risk. It’s probably related to the issuer’s credit versus its other issuers,” he said.

The riskmap, which is the sum of the two components, is 1.96, compared to an average of 6.25 for similar products and 4.51 for all product types.

Risk-reward

Future Value Consultants measures the risk-adjusted return with its return score. The rating is calculated using five key market assumptions: neutral assumption, bull and bear markets, and high and low volatility environments. The best market assumption for these notes would be bullish.

At 7.18 the return score is greater than the 6.85 average for the leveraged return category.

“This is a good risk-adjusted return compared to similar leveraged structures. The low riskmap really helps,” he said.

The cap, which limits the return, is an impediment to all leveraged notes, he said.

“And yet we still have a very competitive return score. Obviously with a higher cap, the score would have jumped as well.”

Overall score

The overall score measures Future Value Consultants’ general opinion on the quality of a deal. The score is the average of the price score and the return score.

The notes have a 7.81 overall score while the average for the product type is 6.91.

“This is a very good product, according to the overall. You get a nice buffer, the 1.5 times leverage,” he said.

“The cap is really an issue for those who are very bullish. If you’re very bullish, this note is not the right choice.

“However, if your return expectations are moderate, if you’re satisfied with 8% a year, you get some very good value.”

UBS Securities LLC is the agent.

The notes were scheduled to price June 2.

The Cusip number is 90270KGT0.

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