UBS, SocGen notes will use Alibaba stock as underlying for first time

By Emma Trincal

New York, Dec. 7 – Alibaba Group Holding Ltd., the Chinese e-commerce stock that debuted in the U.S. market in September in the biggest initial public offering to date, is now going to be used for the first time as the underlying asset for two new issues coming up in the week ahead.

Both products are designed for income investors.

SocGen

The first to price will be Societe Generale’s reverse convertible notes due May 14, 2015.

The notes will be issued under Rule 3(a)(2), which means they are exempt from registration under the Securities Act of 1933.

The notes are expected to price on Tuesday and settle on Friday, according to a term sheet.

The six-month notes will carry a coupon of 8% per year. Interest will be payable monthly.

The payout at maturity will be par unless Alibaba shares close below the downside limit price, 75% of the initial share price, on any day during the life of the notes and the final share price is less than the initial share price, in which case investors will receive a number of Alibaba shares equal to $1,000 divided by the initial share price.

UBS

On Friday, UBS AG, London Branch will bring its own offering to market. It will price contingent income autocallable securities due Nov. 17, 2017 linked to Alibaba shares, according to a 424B2 filing with the Securities and Exchange Commission.

Each quarter, the notes will pay a contingent payment at an annual rate of 11.35% if the shares close at or above the 70% barrier level on the observation date for that quarter.

The notes will be called at par plus the contingent coupon if the stock closes at or above its initial level on any of the first 11 determination dates.

The payout at maturity will be par plus the final coupon unless the shares finish below the barrier level, in which case investors will be fully exposed to the stock’s decline.

Alibaba

“It’s great,” said a distributor at a different sellside firm from UBS and Societe Generale.

“Anytime you have a new name, it’s exciting. Investors want diversification in their portfolio. These income investors must have piled on other names – the Apple, Facebook and Twitter and so on. It gives them a new asset.

“It’s also very exciting from a marketing perspective.

“I think we’ll see more Alibaba coming up soon.”

A sellsider said that it’s not very common to see an underlying stock being used so soon after the IPO.

Alibaba stock began trading on Sept. 19. Since then, the share price has gained 22%.

“It’s a new stock, a new issue. It tends to be more volatile. This one especially, due to the wide swings that preceded its recent strong bullish trend,” he said.

“We had someone who asked us if we could do a structured note on an IPO stock. Not so easy. There is no restriction, but for the issuer it’s not easy to price. The stock is too new. It’s hard to model up because the shares haven’t been trading for that long.

“I would assume the two notes have quite a little bit of a cushion priced into it by the issuer.”

Alibaba shares are on a strong bullish trend. The stock closed up 2.68% on Friday at a new high. In just the past month, the share price has increased by 30%.

“Investors can always buy the stock. And it’s true that you’re capping your upside with these notes. But there is a reason why you would buy something rather than something else. It depends on what you’re looking for,” the distributor said.

Seeking yield

“You really have two types of investors,” the distributor said.

“You have the equity type: they want to participate in the upside, they want to take some risk and get equity-like returns.

“And then you have the second type: the income investor. Those people want more yield. They may buy high-yield bonds. Or they may prefer to look at these offerings where they can get a higher return and some protection on the downside. For those types of investors, getting that kind of yield is attractive. For the income guy, this kind of structure works. Anytime you can get a yield between 8% and 12%, you’re going to get their attention. You don’t want a yield that’s too high because it would come with too much risk, and you don’t want something too low either of course. It has to be within the comfort zone. At the end of the day, you have to be able to live with the risk.”

The long and the short

The sellsider noticed that the UBS note is longer than the Societe Generale product.

He explained why.

The UBS structure is a three-year contingent coupon autocallable, often called “phoenix” autocallables in the industry because the coupon payments depend on a coupon barrier that is typically lower than the call trigger, oftentimes situated at the initial price level.

The Societe Generale deal is a six-month reverse convertible paying a fixed coupon with a slightly higher barrier, but one that is observed any time during the life of the note. The daily monitoring is called an “American” barrier as opposed to the “European” barrier, which is final.

“Three years is pretty typical for a phoenix structure,” the sellsider said.

“In general, reverse convertibles are shorter. That’s because reverse convertible are monitored daily while the phoenix is a European barrier.

“The European barrier doesn’t carry that much value since it’s less risky, so you have to go longer to make the structure. The longer maturity also allows you to lower the barrier. You get a lower barrier and a European barrier. It’s less risk. To do that, you have to extend the maturity. You also have to add some more by the way of the contingency of the coupon.”

UBS Securities LLC is the agent for the deal issued under its name. The Cusip number is 90274B881.

SG Americas Securities, LLC is the agent for the Societe Generale offering. The Cusip number is 83368WXS5.

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