UBS’ $10 million autocalls on Las Vegas Sands need deeper barrier, sources say

By Emma Trincal

New York, June 23 – UBS AG, London Branch’s $10 million of airbag autocallable contingent yield notes due June 15, 2022 linked to the common stock of Las Vegas Sands Corp. need a deeper barrier, sources say.

Interest will be payable monthly at an annualized rate of 14.1% if the stock closes above its coupon barrier, 80% of the initial level, on the related observation date, according to a 424B2 filing with the Securities and Exchange Commission. The notes will` be called automatically at par if the shares close at or above the initial share price on any monthly observation date.

The payout at maturity will be par unless the final share price is less than the conversion price, 80% of the initial share price, in which case the payout will be a number of shares equal to $1,000 divided by the conversion price.

Price action

“The stock has jumped more than 50% since its pandemic low,” said Tom Balcom, founder of 1650 Wealth Management. Last year’s Covid-19 bear market pushed down the share price to a $33.30 low on March 18, 2020, which Balcom was referring to. On the trade date, the closing price of the stock was $50, setting the barrier level at $40.

“You’d have to go back to the pandemic lows last seen in April of last year to hit that barrier. It doesn’t mean it can’t happen. But as long as you don’t breach that threshold, you’re fine,” he said.

Lower entry

The stock is priced at a discount from its 52-week high of March 2021, he said.

“The stock has retraced from that high, which is good. It provides a nice entry price,” he said.

Yet with an implied volatility of 36%, the price could move significantly in both directions.

“It’s a volatile stock, and I’m not familiar with the business operations of Las Vegas Sands. Most of their traffic is in Macau and Asia. I’m not sure they have the same traffic as we have in the U.S. I know that here, a lot of people have returned to resorts, parks and casinos. There has been a big increase in the number of visitors to Las Vegas.”

Balcom said the risk-adjusted return of the product could be better.

“I probably would want something a little bit more defensive,” he said.

“It's an income play. 14% is a juicy yield. But this is also a stock that has doubled in price in the past 15 months.”

“You can’t be too bullish when you buy something that limits your upside to 14%,” he said.

“The 80% barrier seems too modest for a stock as volatile as this one.”

Call risk

Another concern was the monthly frequency of the automatic call. A first call may happen as early as a month after issuance since the structure did not offer any call protection feature.

“It’s a nice return for one month. But it’s probably frustrating for the investor,” he said.

A market participant offered a similar comment.

“The fact that there is no ‘no-call’ may be attractive for some people but not for me,” he said.

“If I go through the process of buying the note, I’m not sure I want the hassle. Especially when you pay the full fee upfront and get called right away,” he said.

The prospectus disclosed a 0.25% fee amount.

“This happens to be low. That’s a plus,” he said.

“It’s a byproduct of the expected life of that note. I would say it’s probably a three-month life.

“It traded through UBS. It could have been a fee-based deal, or they may have scaled the fee based on the fact that the expected life of the notes is going to be less than the stated maturity.”

Post Covid uncertainty

Some of the recent sell-off may have to do with the large business in gaming operations in Macau, he noted. Any resurgence of the coronavirus in Asia due to new Covid variants or a slow pace in vaccinations could negatively impact revenues growth, he said.

“The good news is you start at a lower price. If you’re getting in now, a barrier on top of that, it should make you feel good about the ability of getting your coupon,” he said.

That said, any investor should have a “strong opinion” about Las Vegas Sands, he noted.

“I don’t. But I can see how someone could construct a story around the name,” he said.

Despite the recent retracement of the stock, this market participant would be reluctant to invest due to the volatility of the underlying.

“What would make me hesitate is the size of the barrier. If it was 40% for that sort of coupon, great.

“I would be very hesitant with a protection of only 20% especially if it’s not a buffer. 20% is not a very substantial barrier for such a volatile name.”

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

The notes settled on June 16.

The Cusip number is 90279B126.

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