UBS’s partially protected notes on MSCI Europe offer defensive, value play on region

By Emma Trincal

New York, Oct. 30 – UBS AG London Branch’s 0% partial principal at risk securities due Nov. 4, 2020 linked to the MSCI Europe index offer uncapped leverage over a short tenor for those conservative investors willing to bet on a European market rebound.

If the index finishes at or above its initial level, the payout at maturity will be par plus at least 130% of the gain, according to a 424B2 filing with the Securities and Exchange Commission.

Otherwise, the payout will be par plus the return with a minimum payout of 95% of par.

The MSCI Europe index replicates the equity returns of 15 developed markets in Europe.

High protection

Matt Medeiros, president and chief executive of the Institute for Wealth Management, said he found the two-year tenor attractive given the quasi total protection.

“I like the fact that it’s a two-year and that it’s leveraged on the upside without a cap. I’m cautiously optimistic about Europe. The area seems to be undervalued. Most European equity indices have failed to participate in the rally over the last couple of years,” he said.

The MSCI Europe index has gone up by less than 12% over the past two years while the S&P 500 index has jumped nearly 30%.

“If we’re wrong and there are issues such as the euro or the Italian deficit, things of that nature, our loss is limited to 5%,” he added.

“Even if the structure forces you to have the exposure to the first 5% losses, I wouldn’t mind it because I understand the asset class. Otherwise I wouldn’t even contemplate purchasing it.”

Low entry

A portfolio manager who usually invests in exchange-traded funds was intrigued by the notes.

“Ninety-five percent is a good protection,” he said.

“Even if things don’t look so good in Europe especially with Brexit, this is an index that’s not far from its bottom of two years ago. It’s already down 20% in the last 10 months. So you’re definitely not buying at the high. You’re getting a bargain.

“And then your losses are capped at 5%.

“I think I would be a buyer on this one.”

Yield

From a pricing standpoint both the high dividend yield of the underlying index and the nature of the protection have enabled the issuer to enhance the terms of the structure, said Matt Rosenberg, sales trader at Halo Investing.

“It looks good. A lot of it is a matter of the underlying. This index, as most European equity benchmarks, shows a very high dividend yield. That’s why Europe is so popular on the issuance base.”

The MSCI Europe index carries a 3.66% dividend yield.

The most commonly used European index for U.S.-distributed structured notes is the Euro Stoxx 50. It is the blue-chip index for the eurozone. Its dividend yield is 3% compared to 1.73% for the S&P 500 index.

In order to benefit from advantageous terms such as leverage and protection, noteholders have to forgo dividends, which issuers use to buy the embedded options necessary to create the product.

A matter of principal

The extent of the downside protection is also an important factor. Just by switching to 95% from 100% principal protection, an issuer can dramatically shorten duration.

For instance another issuer, JPMorgan Chase Financial Co. LLC just announced the pricing of leveraged notes tied to the Euro Stoxx index. The underlying yields 3%. With less dividends to play with and the entire principal to protect, the structure (1.75 x uncapped upside) had to be longer. Its tenor is five year.

“The 100% protection is going to be more expensive. When investors participate in the first 5% decline, terms of course will improve a lot,” he said.

UBS Securities LLC is the agent with Morgan Stanley Wealth Management as dealer.

The notes will price on Wednesday and settle on Nov. 5.

The Cusip number is 90281B338.

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