UBS’ $21.17 million bearish notes on S&P to fit in various allocation buckets, adviser says

By Emma Trincal

New York, Feb. 25 – UBS AG London Branch’s $21.17 million of 0% bearish barrier early redeemable market-linked notes with daily barrier observation due Feb. 22, 2024 linked to the S&P 500 index could find a place in several portions of a diversified portfolio, a financial adviser said.

If the index closes below the barrier, 73.81% of the initial index level, on any day during the life of the notes, the notes will be automatically redeemed at par plus 1%, according to a 424B2 filing with the Securities and Exchange Commission.

If the notes are not automatically redeemed and the index return is greater than or equal to zero, the payout at maturity will be par plus 1%.

If the index return is less than zero, the payout will be par plus the absolute value of the index return.

Cash, bear play

“The note is relatively short term especially with the call, which may be triggered anytime, noted Jeff Pietsch, founder of Capital Advisors 360.

“So, it’s very interesting if you have money to park somewhere short-term. You’re probably going to exceed the return of a brokerage CD.”

A second possible use of the notes would be directional. Investors with a strong bearish bias may find the product attractive as a means to express their view, he added.

“If your outlook is negative, it’s also an opportunity for inverse participation in a bear market.

“But even if I was extremely bearish, I would be reluctant to buy the notes for this particular reason.

“Aiming strictly for the absolute return after the correction we already had doesn’t really justify buying the notes.

“However, it’s a matter of opinion.

“If you are very bearish, you might find the notes attractive for the inverse participation component,” he said.

Bond replacement, hedge

A more compelling reason to consider the note would be as a bond alternative. In this context, the notes could also be seen as a hedge, he explained.

The principal protection is established in the structure, which even offers at least an additional 1%. Such feature allowed investors to treat the security as a fixed-income replacement.

“It’s like having a bond without buying a bond position over a two-year window. You do have the inverse participation and if the index goes up, it won’t hurt you on the upside.”

Investors could also use the notes as a hedge.

“You’re committing a lot of capital, but it works as a non-correlated hedge. If the market is down, you get the inverse participation. If it’s up or down a lot, you still collect 1%. You’re not losing anything,” he said.

Overall, the notes may be used in different portions of the portfolio, including the cash, fixed-income and equity buckets.

“This gives you a lot of flexibility,” he said.

Low chances of high return

Another financial adviser said the structure of the notes did not meet his criteria.

“I can’t get too excited about it. It’s not so much that I don’t bet against the market. I don’t like it because you only win in one scenario. You can’t be wrong. If you are wrong and the market is up or if it’s down too much, you earn almost nothing,” he said.

Because the automatic call is facilitated by the “any day” trigger, the likelihood of a small 1% return is high, he said.

“First, it’s hard to know what the market will be like in two years,” he said.

“You can’t lose your principal. But you certainly can earn next to nothing.

“Your chances of getting a decent return are limited to this narrow window, anywhere down from 0% to minus 26%, and you’d have to get as close as possible to 26% to make it worthwhile.”

This adviser said a bear market is due, but no one knows when. If a severe pullback happens within the term, investors run the risk of an early redemption with a “meager” 1% return.

“That’s the call scenario. Not very impressive unless it happens right away.

“If you don’t get called, you’re going to be locked up for two years with a very high chance of getting the same 1%. It will just take longer.

“Either way, the odds are not in your favor,” he said.

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

The notes settled on Thursday.

The Cusip number is 90279DZA7.

Bears in sight

Bear notes were not in favor last year amid a robust bull market, which saw the S&P 500 index climb 27%. But those products have reappeared this year with the increased volatility.

In February, GS Finance Corp. priced $2.73 million of 0% bearish autocallable notes due May 12, 2023 linked to the S&P 500 index. The call trigger observed any day was set at 65%. Below this barrier, the notes paid a 3.5% call premium. The absolute return on the downside was available for any index decline at or above the 65% barrier. The downside if the index was up at maturity offered a 20% buffer.

A month earlier, GS Finance priced a similar issue for $4.23 million.

At the end of January, BofA Securities, Inc. priced on the behalf of Toronto-Dominion Bank $16.89 million of 0% bear Accelerated Return Notes due Feb. 24, 2023 also linked to the S&P 500 index.

If the index return is negative, investors receive 3x the absolute value of each point of index decline, subject to a maximum return of 22.5%.

If the index return is positive, investors will lose 1% for every 1% that the index increases.

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