UBS and Credit Suisse, catering to contrarians, launch ETNs linked to energy amid oil slump

By Emma Trincal

New York, Feb. 9 – In the midst of a continued bear market in oil prices, two banks offered new exchange-traded notes linked to energy-based reference assets.

Some advisers said it is a buying opportunity for bulls looking for bargains in the distressed asset class.

Credit Suisse AG, Nassau Branch priced $25 million of 0% Credit Suisse X-Links WTI Crude Oil index exchange-traded notes due Feb. 8, 2036 linked to the Bloomberg WTI Crude Oil Total Return subindex.

The notes, listed under the ticker "OIIL,” began trading on the NYSE Arca on Tuesday morning.

The company plans to price up to $100 million of the notes in total.

Separately, UBS AG, London Branch launched two leveraged ETNs referencing master limited partnership indexes in what appears to be the “replacement” of similar ETNs, which were called in January as the result of mandatory redemptions.

UBS priced an initial $25 million principal amount of 2xMonthly leveraged exchange-traded access securities, series B, due Feb. 12, 2046 linked to the Alerian MLP Infrastructure index, according to a 424B2 filing with the Securities and Exchange Commission.

UBS plans to issue up to $100 million of the notes. The remainder will be sold from time to time at varying prices.

The notes, listed on the NYSE Arca under the symbol “MLPQ,” began trading on Tuesday morning, according to a press release.

In addition, UBS priced $25 million of 2xMonthly Leveraged ETracs, series B, due Feb. 12, 2046 linked to the S&P MLP index. The ETNs, listed on the NYSE Arca under the symbol “MLPZ,” began trading at the same time.

UBS plans to issue up to $100 million of the notes.

“This is an attempt from investors to go bottom-fishing,” said Tom Balcom, founder of 1650 Wealth Management.

“We’ve seen severe declines in existing ETNs tracking oil or commodities already. Pricing at these levels may be more attractive than using existing ones.”

After a call

On Jan. 20, UBS called two of its two-times leveraged MLP ETNs as a result of a so-called “acceleration event,” which means that losses had hit a set trigger forcing the issuer to call the notes as mandated by the prospectus.

One of the redeemed series of notes was the ETracs 2xMonthly Leveraged S&P MLP Index ETN due July 14, 2045, listed under the “MLPV” symbol. The other was the ETracs 2xMonthly Leveraged Alerian MLP Infrastructure index ETNs due July 9, 2040, listed under the symbol “MLPL.”

While it’s unclear whether the two new products are designed to replace the old ones, it seems likely. They do offer the same leverage and index exposure as their prior versions.

“It’s not common to see an issuer calling an ETN and recreating another one,” an ETN specialist said.

“It’s pretty unusual for the acceleration event to kick in in the first place.

“Energy prices have been going lower, much lower than anybody thought it would.

“Maybe people think it’s now a good price to get in.”

Short-term play

Balcom agreed. For some investors it might be the right time to invest in energy, he said. But he would not use any leverage if such was his view.

“These ETNs are for short-term investors. They’re used by institutions or hedge funds. With leverage comes decay. It’s not a buy-and-hold investment. If you see a spike in oil coming up soon, that’s a good way to express your view,” he said.

WTI crude oil declined by nearly 5% on Tuesday, trading at $28 a barrel. The commodity has lost 72% in the past five years.

MLPs

The ETN series launched by UBS reference master limited partnerships, which are almost entirely energy-based.

The Alerian MLP Infrastructure index comprises 22 energy infrastructure master limited partnerships. It is down 18% for 2016 and 41% for the past 12 months.

The S&P MLP index has a 93.6% weighting in energy, according to Standard & Poor’s website. The index has declined by 12.5% so far this year and is down 42% for the past 12 months.

“MLPs were a blood bath. They sold off. It was a terrible trade last year. We sold one of those last year, and we replaced it with a structured note on XLE. It has leverage but only on the upside,” Balcom said.

The ticker “XLE” designates the Energy Select Sector SPDR exchange-traded fund, which tracks the equity price of major U.S. oil and gas companies.

“We typically don’t use leveraged ETNs or ETFs. Those two new ETNs have monthly leverage. It may not be as volatile as a daily reset, so that might be a way around the volatility issue. But you still have double exposure on the downside. If your view is wrong, you get twice the loss. That’s why we avoid those products. One of the benefits of structured investments is that it’s point to point and you only get the leverage on the upside,” he said.

Slippage

Steven Jon Kaplan, founder and portfolio manager of True Contrarian Investments LLC, said that the energy sector offers opportunities that make those new products timely.

“As a contrarian, I like the concept of being long energy right now. It’s a good idea. You just want to make sure it’s a good idea to do that via an ETN,” he said.

One of the issues with the UBS leveraged ETN is the “beta slippage,” he said.

“If the price goes up and down a lot, you’re going to end up losing from those moves because each time the underlying drops it always takes a larger percentage of gains to go back to where you were. That’s the geometric function of losses. The slippage is an issue with both ETNs and ETFs. The more the asset is volatile, the more you lose,” he said.

Negative roll yield

Regarding the Credit Suisse ETNs, which are linked to an index of WTI crude oil futures contracts, his concern was the risk of contango, which is the cost of rolling futures contracts on a steep curve.

“There is no physical delivery of course. The index is a succession of rolling futures contracts. But as you get close to expiration, the futures curve gets steeper. Traders know when contracts have to roll and they will charge more for the next month. You end up with a negative yield, and that has a negative impact on your return,” he said.

“I would rather hold physical commodities. For oil, a better exposure in my view is to buy oil stocks. They are highly correlated with the commodity, but you don’t have exposure to contango.”

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