UBS’ $17.41 million trigger autocallables tied to MSCI EM, S&P 500 seen as ‘reasonably’ priced

By Emma Trincal

New York, Aug. 7 – UBS AG, London Branch’s $17.41 million of trigger autocallable contingent yield notes due Sept. 3, 2026 linked to the lesser performing of the MSCI Emerging Markets index and the S&P 500 index appear to be “reasonably priced,” a market participant said.

Each quarter, the notes pay a contingent coupon at an annual rate of 8.36% if each index closes at or above its coupon barrier level, 70% of its initial level, on the observation date for that quarter, according to a 424B2 filing with the Securities and Exchange Commission.

After one year, the notes will be automatically called at par of $10 if each index closes at or above its initial level on any quarterly observation date other than the final one.

The payout at maturity will be par unless either index finishes below its downside threshold level, 50% of its initial level, in which case investors will be fully exposed to the decline of the lesser-performing index.

Correlation

“The pricing doesn’t look bad. In fact, it looks quite reasonable,” a market participant said.

Contingent coupon deals with a worst-of payout such as this note are among the most popular structures seen of late, he noted.

The product has two particularities: its relatively long maturity and the use of two underlying indexes not often seen together for the pricing of worst-of deals.

The most frequently used benchmarks for those products are the S&P 500, Russell 2000 and Euro Stoxx 50 indexes, according to data compiled by Prospect News.

Barriers

This market participant distinguished the 70% coupon barrier from the 50% barrier observed at maturity.

“The 50% is pretty conservative, but the 70% barrier for the coupon may be easily breached. The emerging markets one could drop 30% anytime, so you could be without a coupon for some time,” he said.

“That’s the risk of having a volatile index as underlying.”

On the other hand, the two underliers are both “well-known, broad-based indexes clients are comfortable with,” he said.

“Two indexes is not like two single stocks or two sectors.”

The two indexes are not highly correlated, he noted.

The three-year correlation coefficient between the S&P 500 and the MSCI Emerging Markets is only 0.695, according to Morningstar.

The less correlated the underlying assets are, the greater the premium for the higher risk.

Maturity

“Ten years is a long time, and not every investor is going to invest in a note that gives you UBS risk for that long,” he said.

“The correlation is not high, but that’s how you can get this low barrier. People are looking for these types of barriers. They like the idea of 50%.”

An industry source said the deal is attractive, although he was not sure whether the long tenor added much to the protection.

“Nice. This pricing seems OK,” he said.

“Was it necessary to have the maturity of 10 years to get the low trigger? It depends on the ‘sellability’ of the product.

“People right now are looking at 80% for the barrier. An 8% coupon is the bogey.

“I’m not sure you need to go out 10 years to get that protection, but you certainly get a nice coupon.”

Range accrual

Both the long tenor and low correlation between the indexes help make the structure more compelling.

“Negative or low correlations are always positive from a pricing standpoint,” this source said.

The notes are specifically designed to generate yield, which is something investors are constantly looking for in today’s low-rate environment, he explained.

“[Registered investment advisers] are looking for yield enhancement products right now. Those deals are incredibly popular.

“You could look at this UBS structure as some kind of range accrual. You put some equity in the product and as long as the equity stays in a range, which here is above the barrier, you get your coupon. Over the initial price, you get called out.

“It’s not a daily accrual floating coupon. You get the coupon or you don’t. But in the RIA space, those notes are extremely popular right now.”

The notes (Cusip: 90275Y260) priced on Aug. 29.

UBS Financial Services Inc. and UBS Investment Bank were the underwriters.

The fee was 3.5%.

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