UBS' airbag securities tied to Euro Stoxx 50 would be just right if only shorter, sources say

By Emma Trincal

New York, June 19 - UBS AG, London Branch's 0% airbag performance securities due June 30, 2022 linked to the Euro Stoxx 50 index would be near a great structure, sources said, if it was not for the 10-year tenor.

The payout at maturity will be par plus 303% to 327% of any index gain, according to an FWP filing with the Securities and Exchange Commission. The exact participation rate will be set at pricing.

If the index finishes at or above the threshold level but at or below the initial index level, the payout will be par. The threshold level is 50% of the initial index level.

If the index finishes below the threshold level, investors will lose 2% for every 1% that the index declines beyond 50%.

Very good terms

"These are ridiculously attractive terms with the exception of the 10-year [tenor], obviously," said Dean Zayed, chief executive officer at Brookstone Capital Management.

"Both the three-times upside with no cap and the 50% downside protection are great - especially 50% downside over 10 years. ... As we know, the longer you go, the less likely you are to get the barrier violated."

He noted that the downside protection is not a barrier but a buffer, which means that investors begin to lose money only beyond a 50% decline in the underlying index.

The two-times threshold multiplier applies to the amount of index decline beyond the buffer, which makes this protection feature more conservative than an equivalent barrier, which, once breached, would trigger losses from the initial price.

For instance, a 60% decline in the index would cause a 20% loss of principal with this product. If the 50% buffer had been a barrier, investors would have lost 60% of principal instead of 20%.

"In every case other than an extreme downturn, you outperform the downside and greatly outperform the upside with the uncapped, three-times leverage," a market participant said.

"From a risk/return standpoint, it's attractive."

An extreme downturn, a 100% fall of the final index level for instance, would lead to a loss of the entire principal. However, even in a severe negative scenario such as a 90% decline in the index, investors would still outperform the index by 10%, incurring an 80% loss.

Too long

But sources said that the long-term maturity of the note is a serious drawback.

"Ten years today seems like an extremely long time given the confluence of events in the world," Zayed said.

"It would be very difficult to sell to a client. It's very long-term with a very thin secondary market and very thin liquidity."

However, the product may be useful in some situations.

"I can see it being relevant for an investor with a very long-term horizon," Zayed said.

"It may appeal to someone who doesn't need liquidity or income, to someone willing to say 'Forget about the euro zone problems now, I'm going to invest this pool of money for the long term and I will wake up in 10 years with a decent return.'

"It could be an institutional investor or high-net-worth [investor] looking for a place to park their money or a long-term investor, for instance a younger type of investor."

The market participant said that not everybody is willing to give up liquidity while still taking on some market risk.

"When you talk to clients, five years is already a long time," he said.

"Make it five years with a 30% buffer. It would be much more appealing to the investor."

The notes (Cusip: 90268U473) will price June 26 and settle June 29.

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

© 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.