UBS’ $10 million autocalls on Tesla show several favorable features, sources say

By Emma Trincal

New York, Jan. 17 – UBS AG, London Branch’s $10 million phoenix autocallable buffer notes with memory interest due Jan. 14, 2025 linked to Tesla, Inc.’s shares offered competitive pricing, sources said. Pricing was facilitated by the healthy implied volatility of the underlying, the second most used stock last year, according to data compiled by Prospect News.

The notes will pay a contingent monthly coupon at an annual rate of 17.3% if the stock closes at or above the interest barrier, 65% of the initial level, on the related monthly observation date, according to a 424B2 filing with the Securities and Exchange Commission. Any previously unpaid contingent interest payments will also be paid.

The notes will be called at par if the shares close at or above the initial share price on any monthly observation date other than the final date.

The payout at maturity will be par plus the final coupon and any previously unpaid coupons unless the stock finishes below the 65% downside threshold, in which case investors will lose 1.5385% for every 1% loss of the stock beyond 35%.

No. 2 stock

“This is a very interesting one. We see a lot of Tesla deals. But we don’t see a lot of autocalls with a buffer, especially a 35% buffer on a one-year,” a market participant said.

Tesla was the second most used stock underlier last year after Amazon.com Inc. A total of $918 million of notes tied to the stock was priced in 311 offerings last year, according to data compiled by Prospect News.

“The geared buffer is obviously safer than a barrier. You don’t lose that much that quickly.

“That’s why typically a buffer is going to be set higher than a barrier level.

“The fact that the buffer strike is that low plus having such a good coupon with memory, these are awesome terms,” the market participant said.

Memory

The volatility of Tesla’s shares and the depth of the barrier increased the odds of getting “all the coupons,” given the memory feature, which allows investors to collect previously unpaid interests, he added.

“That’s of course if you don’t get called very early, which is highly probable given that it can happen on any month,” he said.

If the stock drops, investors are likely to collect for a longer period of time since the 65% barrier is defensive, he noted.

“Tesla would have to tank massively for the note not to pay all the coupons. This is a stock that can drop a lot but keeps coming back. We saw it in 2022 when the price fell during most of the year and in 2023 when it recovered,” he said.

The deal was struck on Jan. 8 when Tesla’s shares closed at $240.45. On Thursday, the stock closed at $215.55.

While the share price has dropped more since the strike date, the note priced at a “good entry level,” compared to when Tesla hit a one-year high of $300 in July, he said.

Rolling, repricing

“There’s got to be a fair amount of volatility. If you repriced this note today, assuming the same barrier level, you could get an even higher coupon,” he said.

Using an intraday level of $220 on Wednesday, this market participant repriced the coupon at about 18%.

“The only downside is that you could get called in a month. You have to be OK with that. My take on this is that you have here a pretty safe way to get a quick return,” he said.

This market participant said buyers of the notes may have been one or several fee-based account holders.

“It’s almost 1.5% for one month. If you get called, you can just roll into another deal.

“Looks like a very attractive note to me,” he said.

Geared buffer

Brady Beals, director, sales and product origination at Luma Financial Technologies, pointed to two valuable terms. The more appealing a feature, the most expensive it is to price, he noted.

The first feature was the geared buffer.

“It’s very attractive and you don’t see them very often in income products. You usually see barriers. The gearing is in between the strong protection of a traditional buffer and a barrier,” he said.

But the gained safety had a cost, he added.

“A geared buffer versus a barrier will reduce your coupon by about 30%,” he said.

As an example, a 20% coupon would drop to 14%.

Memory tradeoff

The memory was also a feature most investors may appreciate.

“I’m seeing a big shift toward memory coupons. It makes sense. When you have a down year like 2022 followed by a recovery like last year, you’re happy to be able to recoup all your coupons,” he said.

The memory may cut the interest rate by 20%, he added. That would bring a 20% coupon down to 16%.

“But that’s a tradeoff more and more people are willing to make,” he said.

Call risk premium

Finally having a no-call period will also dampen the return given the cost of pricing it.

But this particular note lacks this feature, so its return was not diminished by it.

“I have found that it’s not uncommon to see 12-month notes with a three-month or even six-month no-call. I actually see a lot more of these than before,” he said.

“People feel bullish on the underlying and don’t want to get called right away.”

Introducing a call protection on a note will cut the premium by about 5%, he said.

“It’s far less expensive than the pricing of a buffer and even less expensive than the memory.

“Bulls tend to like no-call periods. In contrast, more defensive investors don’t care that much. They don’t mind being called early,” he added.

Overall, Beals said the pricing of the note was right.

“Tesla is always going to price well. The volatility is there,” he said.

The five-year historical volatility of the stock is 36%. The one-year implied volatility is 46%.

“The way options traders see it is that the name is always going to have a lot of volatility. So that helps,” he said.

UBS Investment Bank is the underwriter. J.P. Morgan Securities LLC is the agent.

The notes settled on Jan. 12.

The Cusip number is 90279WG24.

The fee is 0.1%.

© 2015 Prospect News.
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