UBS introduces ETNs linked to non-energy MLP index with high concentration in private equity

By Emma Trincal

New York, June 11 – A new exchange-traded note from UBS AG, London Branch began trading on Thursday. The notes are linked to an index of master limited partnerships that excludes the energy sector and offer an opportunity for high-yielding variable income, according to a company press release.

Private equity companies have an 85% weighting in the index and make for half of the 18 names, according to the prospectus.

“When people think of MLPs, they think of energy MLPs. But there are a lot of MLPs out there that have nothing to do with energy,” a market participant said.

As many MLP investors are already overly weighted in energy, the new ETNs should give them an opportunity to diversify away from the sector while retaining the yield and tax benefits of MLPs, he added.

New index

UBS priced $25 million principal amount of 0% exchange-traded access securities due June 10, 2044 linked to the Wells Fargo Master Limited Partnership ex Energy index, according to a 424B2 filing with the Securities and Exchange Commission.

The company sold the notes at par to underwriter UBS Securities LLC.

UBS plans to issue up to $100 million of the notes. The remainder will be sold from time to time at varying prices.

The index was created in April by Wells Fargo Securities, LLC. It tracks the performance of MLPs that do not have an energy focus and that have a market capitalization of at least $100 million at the time of inclusion, according to the prospectus.

Investors in the ETNs are seeking exposure to non-energy MLPs. The 18 constituents listed in the prospectus turn out to be very concentrated in the financial sector, especially in private equity, according to the list of the index constituents in the prospectus.

Private equity: heavy weights

The top nine companies composing the index are all large private equity firms. Those are KKR & Co. LP, Blackstone Group LP, Icahn Enterprises, LP, Lazard Ltd., Carlyle Group LP, Och-Ziff Capital Management Group LLC, Oaktree Capital Group LLC, Apollo Global Management LLC and Fortress Investment Group LLC. Those companies together have a weight of nearly 85% of the index. Other names are in the financial sector, such as asset manager AllianceBernstein Holdings LP (3.66%). Most other components are in the real estate or mortgage sector.

“The index happens to be very heavily concentrated on private equity. I guess you can see it as a private equity index, although you also have other stuff in there too,” the market participant said.

“The main point here is that a lot of people love MLPs. But they think they’re only available for energy. They may want to continue to use MLPs but in other sectors.”

Diversification

Investors have increasingly been focusing on MLPs as an asset class, Christopher Yeagley, head of ETracs at UBS, said in the company’s news release.

“This is the first product with exposure to MLPs that exclusively operate outside of the energy industry,” he said.

“They’ve identified a market segment they want to capitalize on,” a source said.

Elliot Noma, founder of Garrett Asset Management, LLC, said that he is “intrigued” by the concept of non-energy MLPs.

“I haven’t invested in MLPs in a while. But the reason I was looking for MLPs in the first place was because I wanted to get exposure to energy. So a play on non-energy MLPs is intriguing,” he said.

High coupon

But the main goal of the ETracs is to generate income, he said.

The yield is offered in the form of a variable monthly coupon linked to the cash distributions of the index constituents less fees.

The tracking fee is 0.85% per annum.

The index yield as of June 6 was 7.69%, according to the prospectus.

“Everyone is looking for yield. The 85 basis points is standard for an ETN. And it’s cheaper than a mutual fund,” the market participant said.

Noma said the yield is the most attractive feature.

“What’s really interesting is the coupon. At 8%, it’s high relative to what’s out there in the market,” he said.

“If you want yield, you have to look in that kind of structure.

“Central banks have really succeeded in doing what they wanted to do, which is to give markets confidence that they’re willing to do whatever it takes to keep rates down. Some asset classes are not delivering the same returns they once did. Commodities have not done so well this year. Equity markets, while still up, have had some issues. The rally is not as strong as it was last year.”

The S&P 500 is up 5% this year versus 11% during the same time last year.

“Anything today that gives you high yield looks very attractive, especially if it’s liquid like an ETN,” he said.

Tax benefits

With the MLP exposure, investors benefit from the partnership taxation treatment, which has been one of the drivers behind the popularity of this asset class, the market participant said.

“MLPs have one level of taxation only, at the investor’s level. They’re not subject to corporate income taxes, and that’s a benefit that you usually don’t get with publicly traded companies. This so-called pass-through helps the company’s bottom line. They tend to distribute most of the income to investors,” he said.

Index performance

Investors may also be seeking participation in the index.

The prospectus offers backtesting data from Dec. 31, 2008 through June 6 that shows that the index outperformed the S&P 500 index. The annualized return of the index over the estimated historical period was 34.78% versus 17.74% for the S&P 500. The prospectus also compared the index performance to that of the Alerian MLP Index Total Return, which was lower at 29.53% per year over the period.

“You must be bullish on the performance of the index constituents, but it’s the 8% coupon that’s really eye-catching,” Noma said.

“People need higher yields in this environment. Interest rates are low, as we all know. Credit spreads were a lot higher last year and have now tightened. Sovereign debt in Spain or Italy is trading a lot tighter than before.

“There is a number of opportunities out there that were available a year ago and that are no longer available right now.

“They came out with a new product. It’s a niche. It offers a new type of exposure, but what makes it fairly appealing is the coupon.”

The ETracs Wells Fargo MLP ex Energy ETN trade on the NYSE Arca under the ticker symbol “FMLP”.

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.