UBS’ $10.1 million trigger autocalls offer diversified bet on economic rebound via basket

By Emma Trincal

New York, May 12 – UBS AG, London Branch’s $10.1 million of trigger autocallable contingent yield notes due May 10, 2023 linked to an equally weighted basket of common stocks may have appealed to investors seeking to get exposure to a booming economy while diversifying their approach in using stocks picked across several sectors, sources said.

The basket consists of Boeing Co., Boston Scientific Corp., Capital One Financial Corp., Darden Restaurants, Inc., Eastman Chemical Co., Fortive Corp., JPMorgan Chase & Co., Southwest Airlines Co., Micron Technology, Inc. and Pioneer Natural Resources Co., according to a 424B2 filing with the Securities and Exchange Commission.

The notes will pay a contingent quarterly coupon at an annualized rate of 7.4% if the basket closes at or above its 70% coupon barrier on the related quarterly observation date.

The notes will be called at par of $10 plus accrued interest if the basket closes at or above the initial basket level on any quarterly observation date after six months.

If the notes are not called, the payout at maturity will be par unless the final price of the basket is less than the 70% downside threshold, in which case investors will be fully exposed to the basket level decline.

Old fashioned basket

“It’s nice to have a basket for a change instead of a worst-of,” an industry source said.

“With a worst-of, you’re looking at a particular stock. The only one that counts is the one that goes against you. Here you have a weighted average. Even if some names in the portfolio are down, one or several going up will lift up the others.”

Traditional basket-linked notes make for only 30% of all products tied to multiple stocks with the remaining 70% going to worst-of structures, according to data compiled by Prospect News for the past three months.

Underlying baskets tend to comprise securities in the same sector, which is not the case with this note, the source noted.

The underlying basket components are companies across a wide range of sectors, such as industrials (Boeing, Southwest Airlines and Fortive), financials (JPMorgan and Capital One), health care (Boston Scientific), energy (Pioneer), materials (Eastman Chemical), consumer discretionary (Darden Restaurants) and technology (Micron).

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“I like the components and the construction of this note,” he said.

Several of the companies in the basket operate in industries that are expected to grow under a post-Covid economic expansion, he noted, such as restaurants and airlines. Financial stocks should benefit as well from a strong economic rebound, which are accompanied by higher interest rates.

“I haven’t seen notes on baskets for a while and certainly not notes with a specific recovery theme like this one. It’s a nice approach in terms of getting broader exposure while focusing on a particular idea,” he said.

He noted that indexes add the benefit of diversification with broad exposure while not capturing a particular theme such as the recovery. The use of ETFs may allow one to build a portfolio based on the expected economic rebound but usually single asset underliers limit the exposure to one sector, he said.

Bespoke

A market participant said he was intrigued by the underlying.

“The basket is odd. I’m not sure who would have dictated the names in the basket. It could be a third-party,” he said.

“They’re definitely looking for a recovery play. They picked the names themselves. Or it came from the bank’s research, but they didn’t want to publicize it.”

The specificity of the underlying and the size of the deal led him to speculate that the offering originated from a reverse inquiry, with the bank opening up the trade to others for more liquidity.

“Looks like they may have a particular investor that came in. It could have been the issuer selling it to a third party, possibly through a lead order.”

UBS Securities LLC and UBS Investment Bank are the agents.

The notes settled on Monday.

The Cusip number is 90278Y440.

The fee is 1.5%.

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