UBS' capped index knock-out notes linked to S&P 500 target investors with no bull or bear bias

By Emma Trincal

New York, Aug. 14 - UBS AG, London Branch's 0% capped index knock-out notes due Sept. 5, 2013 linked to the S&P 500 index are for investors who envision a market trading range bound over the next year. Willing to take on risk, investors in the notes lack a clear conviction and are neither bullish nor bearish, sources said.

A knock-out event will occur if the index's closing level is less than the initial level by more than 20% on any day during the life of the notes, according to an FWP filing with the Securities and Exchange Commission.

If a knock-out event does not occur, the payout at maturity will be par plus the index return, subject to a minimum return of 6.75% and a maximum return that is expected to be 15%.

If a knock-out event does occur, the payout will be par plus the lesser of the index return and the maximum return. If the index return is negative, investors will be fully exposed to the negative performance of the index.

Channel

"This is for someone who has a range-bound view on the market," said Tom Balcom, founder of 1650 Wealth Management.

"If you are bearish, you wouldn't buy it because you would worry about the barrier being breached. If you are bullish, you would not want it either because of the cap."

He said that the 20% protection is contingent and not the equivalent of a 20% buffer.

"We believe in hedging asset classes because nothing is certain. You have some variables to take into account: the elections coming up, the fiscal cliff, Europe, the Middle East. That's why there is risk," he said.

"But 20% is not bad. It would be the S&P 500 going down from 1,400 to 1,125. It seems like a lot unless you're very bearish.

"It's a decent note if you believe the markets will trade in a range; otherwise, for the bulls and bears this is not the right product."

Investors in the notes have to assume the credit risk of UBS.

"All the banks have credit risk, headline risk in the news. But governments appear to be behind. I am diversifying by banks, credit risk, by country. Any investor should do that," Balcom said.

Not for defensive players

For Donald McCoy, financial adviser at Planners Financial Services, one category of investors would find very little appeal in the product.

"The point for someone using structured products is to avoid the big loss. Here, the big risk you're taking is that there will be a big loss," McCoy said.

"I can't imagine recommending that to a conservative client. They want to avoid the potentiality of a big loss. Even if a 20% decline is unlikely, it can always happen. And if the barrier is breached, the whole show is over. You've lost your downside protection at that point. That's exactly what a conservative client would seek to avoid."

But for investors with a greater risk tolerance or a longer timeframe, the product may be a good fit.

"If you are a growth investor with a longer time horizon, at least you can play the odds that the market will not drop by 20% from the starting point," McCoy said. "Even if it drops, you still have the time to make that up.

"A conservative investor is not going to give up the protection they're really seeking. The aggressive investor would not want the cap.

"But I think a moderate-to-growth investor would be up for this."

UBS Investment Bank is the underwriter. JPMorgan Chase Bank, NA and J.P. Morgan Securities LLC are the dealers.

The notes are expected to price on Friday and settle Aug. 22.

The Cusip number is 902674LF5.

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