eUNITs on S&P 500 Composite Stock Price likely to attract mainstream interest, sources say

By Emma Trincal

New York, Sept. 21 - Eaton Vance Management, the investment adviser and administrator of a new trust that will issue units linked to the S&P 500 Composite Stock Price index, is leading the way in the convergence between structured products technology and Investment Company Act of 1940 vehicles, Keith Styrcula, chairman of the Structured Products Association, told Prospect News.

eUNITs 2 Year U.S. Equity Market Participation Trust: Enhanced Upside to Cap / Buffered Downside plans to sell units of beneficial interest in an initial public offering, according to an N-2 filing with the Securities and Exchange Commission.

The newly organized trust is registered under the Investment Company Act of 1940 as a closed-end fund.

The trust seeks to provide returns based on the performance of the S&P 500 Composite Stock Price index.

Eaton Vance Management's affiliate, Parametric Risk Advisors LLC, is the trust's subadviser.

Walks like a duck

"The units are similar to a structured product as the return is linked to a reference asset," a market participant said. "This is a way to have a structured note return in a different package."

The trust plans to list the units on the New York Stock Exchange.

The initial net asset value is $10.00 per unit, and the units are expected to be sold for $10.20 each, according to the N-2 filing.

The trust will conclude its investment activities in 2012, at which time it will distribute its net assets to the unitholders.

The trust seeks to provide a return equal to any percentage increase in the index, subject to a cap of 22% to 26%.

Unitholders will receive only the initial net asset value of the units if the index declines by 15% or less and will lose 1% for every 1% that it declines beyond 15%, according to the filing.

Mass market potential

"A unit of Eaton Vance has put the time and effort to be at the forefront of the convergence of structured products and 1940 Act vehicles," said Styrcula.

"What they're doing is translating the structured products technology into mutual funds and closed-end funds wraps, and it will have a big impact on the industry. By moving structured products away from notes and [certificates of deposit], you have the potential for a massive retail distribution. Some closed-end funds have half a billion to a billion dollars worth of units because they distribute through well-established wholesale operations. You're talking about moving the industry closer to mainstream," Styrcula said.

Several elements in the structure, such as the fact that returns are derived from a reference asset and the existence of a cap and a buffer as well as the termination date, make this product similar to a structured product, several sources noted. Yet some key differences remain, sources noted, adding in some cases to the appeal of the product.

"This is a unit investment trust, not a note. It's a 40 Act entity subject to an entirely different regime," the market participant said. "The trust will issue the units. Eaton Vance Management is the adviser. The unit you buy is not an obligation of Eaton Vance. It's just an obligation of the trust."

As a result, if Eaton Vance was to default, unitholders, at least in theory, would not be impacted, sources said.

No credit risk

Some see in this feature the most interesting aspect of the product.

"This is a way to launch a structured note without credit risk," said a sellsider. "The trust is independent from Eaton Vance."

Others said that the risk remains in the form of counterparty risk as futures contracts change hands over the counter.

"It's a typical OTC risk. You have a diversification around a certain number of different counterparties. Now is it supposed to completely eliminate a Lehman Brothers scenario? No, but you would have the risk diversified across various counterparties and therefore, reduced," an industry source said.

According to the prospectus, the trust enters puts and calls contracts on the index over the counter with counterparties that are of investment-grade quality.

The trust will purchase Treasuries and futures contracts on the index with tenors that are the same as the expected investment life of the trust, the filing said.

The contracts will be structured so that the trust will receive cash from the counterparties if the index increases over the term of the contracts. The trust will have to pay cash to the counterparties if the index decreases by more than 15%.

The notional value of the futures contracts is expected to be at least 80% of the trust's net assets. Eaton Vance will choose the counterparties.

New legitimacy

A second appealing aspect of the product is that it is designed for a new and broader category of retail investors.

"There is a huge community of investors that are investors in 1940 Act funds, and this is a way for them to get a structured product in a different format," the market participant said.

"There's a surge of interest in UITs because investors have taken comfort with 1940 Act products and because [exchange-traded funds] have performed well. So I see a growing interest in UITs looking forward."

Many sources agreed about the significance of the new product especially given the fact that it was put together by a landmark name.

"It gives an extra level of legitimacy to structured notes in general," said Frederick Wright, partner and chief investment officer at Smith & Howard Wealth Management. "Eaton Vance is a big name. These types of products will get into the hands of more investors, who will become more knowledgeable about structured products. It will increase awareness among investors."

But others were more skeptical.

Asked whether the use of unit trusts or other 1940 Act-like products instead of notes will constitute a significant new structuring trend looking forward, the sellsider said, "I don't think so. I think it's pretty expensive for the investor. For the benefit of eliminating credit risk, you end up paying a lot more than a note."

A spokesperson at Eaton Vance declined to comment on the fund saying that it is "still in filing with the SEC."

Eaton Vance Distributors, Inc. is the underwriter.

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