UBS' trigger autocallables tied to WisdomTree Japan fund offer 8% potential yield, long tenor

By Emma Trincal

New York, April 16 - UBS AG, London Branch's 0% trigger autocallable optimization securities due April 30, 2018 linked to the WisdomTree Japan hedged equity fund are designed for investors seeking yield and willing to stay invested for five years even if the hope is to earn a call return, sources said.

While it's likely that the notes will get called, according to a financial adviser who sees the upside risk as the main drawback, the long tenor of the notes still exposes investors to some opportunity cost and market downside risk, another source said.

If the closing share price is equal to or greater than the initial price on any quarterly observation date after one year, the notes will be called at par plus an annualized call return of 8%, according to an FWP filing with the Securities and Exchange Commission.

If the notes are not called and the final price is greater than or equal to 63% to 68% of the initial level, the payout at maturity will be par. Otherwise, investors will share fully in losses. The exact trigger price will be set at pricing.

Good for yield

"If you're a coupon-hungry investor, if your goal is simply to get the coupon even if short-lived, this is a great note," said Dean Zayed, chief executive at Brookstone Capital Management.

"You're likely to be called after year one and make 8%. If getting the coupon is your goal, if that's what you're looking for, then this is a good outcome for you. You'll be happy to get called and to collect your coupon."

But investors looking for upside participation should not consider the note, he added, in particular, investors who are very bullish on Japan.

"My take is that Japan is embarked on an even more aggressive quantitative easing policy than the U.S. as a percentage of its GDP, and if our recent record is any indication, the fact that [the WisdomTree Japan hedged equity fund] is up 25% year to date tells me that there's a lot more room for the Japanese equity market to grow," Zayed said.

"I wouldn't be spooked by the recent surge of equity prices in Japan because I see momentum. I think there can be more upside.

"So for those looking for as much upside as possible linked to Japanese equities, this note is not ideal. I can envision a more attractive product than that."

Tony Romero, co-founder and managing partner at Suncoast Capital Group, said he was not sure whether the notes would even represent a good solution for yield-seekers.

"This product is not an income product because you can only get the coupon once," he said.

"And if the yield is what I'm interested in, why not buy a security that I know is going to give me some yield?

"I'd much rather own a mortgage REIT if I want income and get a 14% dividend yield. I'm getting paid some real income and I can get in and out anytime. I have the full liquidity."

Even if the notes do not offer upside participation, investors considering the product should realize that they have exposure to market risk at maturity and consider the current valuation of the underlying fund, he said.

Upside risk

"I guess this note would be for a Japanese bull who believes in a rally more than in a retracement," Romero said.

"But if you hold that view, if you're looking for the upside, why not buy the fund directly, collect the dividends and be totally liquid? With this product, you're not participating in any of the upside, but you still have full downside exposure if that trigger is hit at maturity."

Romero pointed to the 52-week trading range of the fund, which is currently trading at $46.25.

"The 52-week low is $30.07, and the 52-week high is $47.51. We're now close to the 52-week high, which indicates that the fund is much more likely to price lower than higher," he said.

"If the current price was near the 52-week low, I would certainly be more confident. But it's not."

Investors hope the notes will be called so that they can collect the premium, he said.

"It's not designed for a long-term investor. If you get the coupon, you only get it once: when you're called. You're out and the coupon is all you get," he said.

Term and return

The only way the notes could offer maximum growth would be if they were held to maturity, which is not what they were designed for, Romero added.

"In order to maximize your return, you would have to not be called during the entire period and then finally get called at the end because the longer the time between the trade date and the call, the higher your return," he said.

The ideal scenario for maximum return, which is 40% at maturity, was hypothetical and highly improbable, he added.

"You would need to see the price down from the start date on all of the 16 observation dates - since you get called if the price is the same or higher - and then suddenly be up above the initial level at the end, which is not a realistic scenario," he said.

"Meanwhile, the holder of the notes runs the risk of being invested for five years without earning any coupon. The holder of the notes is not getting any dividend. And the holder of the notes can still lose principal at maturity despite the downside protection. The entire principal is at risk while the upside is limited.

"To be fair, the 32%-37% buffer created between the trigger and the initial price at maturity allows you not to lose any money in this range, and this is perhaps one of the most attractive aspects of the deal. But the liquidity has to be sacrificed, and this buffer is the reward for this sacrifice.

"Meanwhile, you still have the opportunity cost, and your call return is never guaranteed."

The notes (Cusip: 90271C205) are expected to price April 26 and settle April 30.

UBS Financial Services Inc. and UBS Investment Bank are the agents.

© 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.