UBS’ $163,000 trigger phoenix autocalls on United Airlines seen as rewarding recovery play

By Emma Trincal

New York, Nov. 12 – UBS AG, London Branch’s $163,000 of trigger phoenix autocallable optimization securities due Nov. 16, 2022 linked to the common stock of United Airlines Holdings, Inc. pay an attractive coupon for investors betting on the recovery of the airlines industry, sources said.

The bargain price of the underlying stock adds a level of safety to the existing barrier.

If United Airlines’ stock closes at or above the trigger price – 60% of the initial share price – on a semiannual observation date, the issuer will pay a contingent coupon of 25.69% per annum. Otherwise, no coupon will be paid for that semiannual observation date, according to a 424B2 filing with the Securities and Exchange Commission.

If the shares close at or above the initial price on the semiannual observation date, the notes will be called at par plus the contingent coupon.

If the notes are not called and United Airlines’ shares finish at or above the trigger price, the payout at maturity will be par plus the contingent coupon. Otherwise, investors will be exposed to the share price decline from the initial price.

Distressed industry

“Really interesting. That’s a heck of a coupon,” said Steve Doucette, financial adviser at Proctor Financial.

“It’s kind of a neat note although I don’t like single-stock risk. You have to do your due diligence on that one.”

On Dec. 3, 2018, the stock reached an all-time high at $98 a share. It plummeted to $17.80 in March of this year, an 81% decline due to the Covid-19 pandemic. The stock closed at $36.85 on Thursday, or more than twice its low of March. It is still 62.4% off its high of nearly two years ago. For the year to date, the share price is down 58%.

“They’ve received funds from the Cares Act. But there’s no demand for travel so revenues are dropping for the carriers. Covid has decimated the airline industry worldwide. So, it might take a while before they recover. You can never tell. They could go belly up.

“At the same time with a potential for a vaccine, travel should start to pick up again. But how quickly will they recover, that’s the question.”

In addition, while the market likes to focus on the recovery story, the Covid-19 pandemic is worsening. New cases are surging quickly, and investors are worrying about the economic impact of new shutdowns.

“It may take a while before things go back to normal,” he said.

Unpredictable rally

This is what Doucette sees as the downside risk. But the upside risk, or the potential to miss higher returns is also not negligeable, he added.

“Assuming the recovery happens.... we have a vaccine and drugs against Covid. Then the airlines would have a big rally. Do you really want to collect 26% a year in that case? I don’t think so.”

A recovery rally could triple the value of the current stock price over a very short time, he said, assuming a return to the previous high of $98 a share two years ago.

“If you really have any faith in the stock, you might as well be long,” he said.

The automatic call could also cause the notes to underperform the stock.

“If it goes up, you know you’ll get called in six months. That gives you 13%, which isn’t bad. But you run the risk of underperforming the stock.”

Doucette said he did not mean to suggest he was bullish on the U.S. carrier. But for those who are, the notes would not be a valuable play.

“If you’re bullish, if the airlines emerge stronger from this crisis, the stock will probably jump more than 26%. You may be disappointed by the coupon.”

The downside risk remained an issue as well.

“I don’t like to play single stocks. United is probably one of the most volatile in the overall industry. I’m not a stock picker but if I had to pick one, I would probably go for [Southwest Airlines Co.],” he said.

“If I had to buy airlines stocks with a note or directly, I would go for an ETF.”

He mentioned the U.S. Global Jets ETF, as an example. The fund offers exposure to global airlines and jets companies.

Attractive terms

Matt Medeiros, president and chief executive of the Institute for Wealth Management, said he liked the risk-adjusted return of the notes.

“Everybody has cabin fever and at some point, this sector is going to go up a lot,” he said.

“This is a very attractive note in many ways.

“The industry has been beaten up, so you’re getting in at a deep discount.”

In that regard the pricing of a 60% barrier was “acceptable,” he said.

“I usually prefer buffers, but the size of this barrier and the valuation make this note particularly appealing.”

“You do have a good margin of safety,” he said.

Medeiros liked the coupon size as well.

“26% is extremely compelling. If you get called right away, that’s a 13% return in six months. That’s crazy good.”

Another benefit for Medeiros was the choice of the underlying stock.

“United Airlines is one of the best carriers. They have a good management and the necessary scale to face the challenges induced by the drop in passengers’ traffic. I think they’re one of the companies in this industry that is best positioned to recover quickly,” he said.

Alternative to equity

Medeiros was not overly concerned about missing out on the upside.

“I expect a recovery for the airlines, but a slow recovery,” he said.

“Most travel is business travel. The pandemic has shown that salespeople, executives can do their job from home and still do well. If you can save the expense of travel and still do a good job, traffic will not resume to its pre-pandemic levels very quickly. I think it will take time.”

The restrictions associated with the pandemic will not ease rapidly either.

“Quarantines and suspensions of flights won’t go away overnight,” he noted.

“People will have to feel comfortable.

“You may be able to go to the U.S. but not to Italy for instance.

“This is why this note is so attractive. It gives you a very high equity-like return.

“I usually don’t like the autocall. But in this case, if I get called in six months with a 13% gain, I don’t mind it at all.”

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

The notes priced on Nov. 10 and will settle on Friday.

The fee is 0.88%.

The Cusip number is 90282E810.

© 2015 Prospect News.
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