UBS’ trigger phoenix autocallables tied to SPDR Oil & Gas offer high coupon, bet on recovery

By Emma Trincal

New York, Feb. 17 – UBS AG, London Branch’s $100,000 of trigger phoenix autocallable optimization securities due Feb. 22, 2022 linked to the SPDR S&P Oil & Gas Exploration & Production ETF pay a high double-digit contingent coupon rate thanks to rising prices and sustained volatility in oil.

Progress on vaccinations, a recent stimulus and the continued accommodative Federal Reserve monetary policy have fueled hopes of an economic recovery, which led to fresh highs in the broader market. The S&P 500 index hit a new peak on Tuesday at 3,950.43.

If the ETF closes at or above the trigger price – 70% of the initial share price – on a quarterly observation date, the issuer will pay a contingent coupon for that quarter at the rate of 16.99%. Otherwise, no coupon will be paid that quarter, according to a 424B2 filing with the Securities and Exchange Commission.

If the shares close at or above the initial price on a quarterly observation date, the notes will be called at par plus the contingent coupon.

If the notes are not called and the shares finish at or above the trigger price, the payout at maturity will be par plus the contingent coupon. Otherwise, investors will be exposed to the share price decline from the initial price.

Oil bull

“The oil and gas exploration sector had been hit hard a year ago, but we’ve seen a strong rebound since,” said Andrew Valentine Pool, main trader at Regatta Research & Money Management.

The ETF dropped to a $29.48 low in March, down 69% from its previous high of January 2020. Since March however the share price has surged 170%, posting a new high on Wednesday at $79.59.

“WTI just closed above 60 a few days ago for the first time in many months,” he said, referring to the West Texas Intermediate Crude Oil futures, which moved to nearly $62 a barrel on Wednesday, a 13-month record.

The resurgence of oil is going to happen with the economy picking up after Covid, he said.

“It’s already beginning to happen,” he said.

This outlook led Pool to expect the notes to be redeemed at the earliest time.

“I don’t see XOP staying below its initial level,” he said.

“This note is only going to last three months.”

The SPDR S&P Oil & Gas Exploration & Production ETF is listed on the NYSE Arca under the ticker “XOP.”

“Do investors care about reinvestment risk? I think if you explain to them what it all means, if they know to expect getting a little bit more than 4% but it’s only good for three months, nobody is going to argue with you,” he said.

Risk premium

The 17% annual contingent coupon was attractive and reflected the premium associated with a highly volatile underlying, a market participant said.

The implied volatility of the S&P 500 index is at 21%. In comparison, he noted, the SPDR S&P Oil & Gas Exploration & Production ETF has an implied volatility of nearly 53%.

“You get a high coupon because it’s a high vol. asset, “he said.

“What the implied volatility tells you is that there is a high probability for the barrier to be breached, which is why it’s cheaper to price this product. You’re getting the high coupon as a compensation for the risk. That’s the high premium.”

Prices, volatility

Investors tend to like high volatility assets that are moving up in price, he said.

“That’s what structured products do. First, you pick an asset that’s appealing because its price is going up. Second, it’s got to be fairly volatile as well so you can price an attractive coupon,” he said.

The ETF remains cheap. While it has regained some of its pre-Covid value, it is still 56% off its October 2018 high, this market participant noted.

Oil exposure

Eleven deals tied to the SPDR S&P Oil & Gas Exploration & Production ETF have priced so far this year, totaling $3.82 million, including this one, according to data compiled by Prospect News.

The largest one, which priced on Feb. 2, was Credit Suisse AG, London Branch’s $1.14 million paying an annual contingent coupon of 13.75%. Eight of those deals were brought to market by UBS AG, London Branch.

Other indirect plays on oil involve two autocallable offerings of $15 million each both linked to the worst of the VanEck Vectors Oil Services ETF and Advanced Micro Devices, Inc., one from JPMorgan Chase Financial Co. LLC and the other Bank of Nova Scotia.

The stock of choice for oil exposure is Marathon Oil Corp. so far this year. The name was used as sole underlier in seven offerings totaling nearly $38 million.

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

The notes will settle on Thursday.

The Cusip number is 90285C589.

The fee is 1%.

© 2015 Prospect News.
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