UBS' $51.31 million 10% yield optimization notes on Intel offer high coupon, added protection

By Emma Trincal

New York, Aug. 23 - UBS AG, London Branch's $51.31 million offering of 10.03% yield optimization notes due Aug. 25, 2011 based on the performance of Intel Corp. shares was seen as a popular deal because of the underlying stock, the amount of interest paid to investors as well as a structural enhancement provided by the protection mechanism, sources said.

Each note has a face value of $18.96, which was the closing price of Intel stock at pricing, according to a 424B2 filing with the Securities and Exchange Commission.

Interest is payable monthly.

The payout at maturity is par unless the final price of Intel stock is less than 80% of the initial share price, in which case the payout is one share of Intel stock per note.

"A 10% yield is terrific. Assuming UBS is not going to go under a year from now, that's a good deal," said Marc Gerstein, research consultant at Portfolio 123. "They picked a good stock. So it's not the end of the world if you get stuck with it," he said.

M&A underlying story

Pricing on Thursday coincided with Intel's announcement that it will acquire software developer McAfee, Inc. The coupon for the notes priced nearly at the top of the 8.5% to 10.5% range initially given by the company.

"It's impossible to say whether the news made the deal more attractive. You would have to know exactly when it priced in relation to the news. I have no idea," said Gerstein.

Some analysts said that the acquisition is a good strategic move. They saw in the announcement a sign that Intel is trying to step in to the online computing market and to diversify away from an increasingly vulnerable PC market.

"Unemployment is high in the U.S., and the world economy is starting to level off from the growth we've seen a year ago. That's going to impact PC sales and therefore chips," said Robert Castellano, a technology stock analyst at the Information Network.

"On the other hand, we're not falling off the cliff, so I think the stock is likely to trade range bound. If that's the bet of the product, then I think it's about right," he said.

If the stock moves by more than the 10.03% annual yield, which is also the maximum return on the notes, investors would be better off in a direct investment in the underlying shares. The prospectus stated that one of the criteria for suitability is for investors to hold the belief that the "stock will trend sideways."

Atypical protection

The stock has lost nearly 8.5% so far this year and 1% over the past year.

Shares lost almost 23% between April 15, when the price was $24.22, and Monday's close of $18.70.

Yet, this downside move may not be as significant with this deal as it would be with a regular reverse convertible, said Gerstein.

The contingent protection offered by the issuer is the structural feature that makes the product attractive, said Gerstein, as it gives investors added protection.

"They look for a trigger price at maturity, which is unusual. Usually with a reverse convertible, you can breach the barrier on any trading day," he said.

"That's beneficial to the investor. It increases the chances that you're going to get cash. That's what a reverse convertible should be," he added.

Not for everyone

Frederick Wright, partner and chief investment officer at Smith & Howard Wealth Management, said that while the notes seem attractive, his firm does not look at reverse convertibles and generally prefers products tied to broad indexes.

"There might be a place for this in some clients' portfolios, but we're generally more conservative. We think reverse convertibles are a bit riskier than investing with an entire market," he said.

Wright said that even in a flat or non-volatile market, investors cannot really predict whether a single stock will trade "range bound."

He noted that the size of the offering suggested that the deal was popular, adding that it was easy to understand why.

"Ten percent sounds awful good in a period of time when money market rates are virtually nothing and most bond yields are very low," he said.

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

Fees are 1.75%.

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