UBS’s $10 million income autocalls on Zoom offer good terms based on high volatility premium

By Emma Trincal

New York, June 10 – UBS AG, London Branch’s $10 million of 18.25% income autocallable securities due June 8, 2021 linked to the common stock of Zoom Video Communications, Inc. illustrate how a highly volatile underlier allows for the pricing of competitive terms, a market participant said.

He pointed to the high and guaranteed coupon extracted from a single asset over a one-year tenor.

Interest is payable monthly, according to a 424B2 filing with the Securities and Exchange Commission.

The notes will be called at par plus the contingent coupon if the shares close at or above the initial share price on any monthly determination date other than the final determination date.

If the final share price is greater than or equal to the downside threshold level, 50% of the initial level, the payout at maturity will be par plus the final contingent coupon. Otherwise, investors will receive a number of shares of Zoom stock equal to $1,000 divided by the downside threshold level.

Volatility risk premium

“It just goes to show how much volatility there is in the stock for them to be able to give you such a big coupon without the contingency and without a worst-of,” the market participant said.

With this underlying stock, volatility is not a sign of falling prices – quite the opposite.

“It’s one of the fastest-movers in this pandemic, one of the best performers among the stay-at-home stocks,” he said.

The stock has an implied volatility of 73.5%, far above the low-20’s level of the S&P 500 index.

The stock price has more than doubled over the past three months.

Monthly autocall

The video-conferencing company has seen its share price skyrocket as a result of the coronavirus lockdowns, which have forced businesses to operate remotely.

“Volatility doesn’t always mean the stock is going down. Anytime a stock moves a lot up or down, you have a volatility spike,” explained the market participant.

“Without this volatility, the issuer could never have been able to price such a high coupon along with a 50% downside protection.”

The frequency of the call helped somewhat as well.

“The shorter the call lock-up periods, the higher the coupon you can put into it,” he said.

“It’s a bit a function of the short-term volatility.”

The monthly call introduces more reinvestment risk.

“It’s kind of the drawback of the deal. You’ll be taken out after just one month.

“But it’s a very good one-month yield,” he said.

Market risk

Investors may consider an early call as their main risk. But given the high yield, such risk is worth taking, according to an equity trader.

The market risk at maturity was not his main concern.

“If you look at the 50% barrier, I think you’re OK,” he said.

“There’s volatility in the stock, but in its history, it has never dropped 50%. The stock is not going to grow forever. But there will still be a lot of people using the video-conferencing platform.

“The stock price may plateau. But the downside is limited.”

Likely early redemption

What is more likely is the occurrence of an automatic call at the end of the first month, he noted.

“You want to hold this paper for a while and the question is: how likely is it that the stock would not go up for a few months?”

Trying to figure out that probability is not easy, he said.

“There may be some level of saturation. Customers may want to stick to the free version instead of purchasing the pro version. The stock may actually go down, which is good for you.

“Every month you hold on to this paper gives you a better chance to get the full return as long as you’re not concerned about hitting the 50% level. Personally, I don’t think it will come into play,” he said.

Search for yield

Even if called after one month, the notes offer a good opportunity to lock in a high return, this trader concluded.

“If you buy this paper and get called after one month, you’re getting 1.5% for that month. In an environment where the Fed Funds rate is practically zero, that’s pretty good,” he said.

The two-year Treasury yields only 17 basis points and the 30-year bond rate is 1.51%, he noted.

“The 30-year bond gives you in one year what this thing pays in one month.

“I think this paper is worth buying. The downside is limited and if it gets called next month, you’re still in a better place than if you bought a money market fund,” he said.

UBS Securities LLC is the agent, and Morgan Stanley Wealth Management is the dealer.

The notes priced on June 3.

The Cusip is 90276BDG5.

The fee is 0.2%.

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.