UBS’ step-down trigger autocalls on Russell, S&P allow for cumulative return, easier call

By Emma Trincal

New York, March 1 – UBS AG, London Branch’s 0% step-down trigger autocallable notes due March 31, 2028 linked to the least performing of the Russell 2000 index and the S&P 500 index are designed to increase the likelihood of an automatic call without losing any previously unpaid premium.

The notes will be called at par plus a 9.4% annualized call premium if each index closes at or above call level on any annual valuation date, according to a 424B2 filing with the Securities and Exchange Commission.

The call level starts at 100% of the initial level for each index and steps down by 2.5% per year.

If each index finishes at or above 90% of the initial level, the payout at maturity will be par plus 47%.

If the worst performer declines by more than 10% but finishes at or above its 65% downside threshold, the payout will be par. Otherwise, investors will be fully exposed to the decline of the worst performer from its initial level.

Snowball

“This is a worst-of snowball. We’ve seen it many times. The only thing that’s out of the ordinary is the step-down because you have a call price that’s below par and decreasingly below par,” said a market participant.

So-called snowballs are autocallables in which the coupon barrier and call price are triggered at the same level, usually (but not always) at the initial price. Therefore, the payment is a call premium rather than a coupon since it’s only paid if and when the notes are called. The term snowball also refers to the cumulative nature of the payments: upon the call, investors receive the sum of all previous unpaid premium.

The note is different from a traditional snowball in that the call price does not remain at the initial level but decreases progressively, he explained.

“The usual call price is par. Here you can get called below par. What they call a step-down is a feature that makes it easier for investors to get called,” he said.

“It’s not unheard of. But it’s not the most common feature in those deals.”

Simple formula

At each call strike, the embedded derivatives for the trade consist of a long digital option for the payout and a short put. The short put has a strike of 100% and a knock-in at 65%.

“Your put only knocks in if the price is below 65%. Then you lose all the way down from the 100% strike,” he said.

Each of those two option legs – long a digital, short a knock-in put – are applied at different call thresholds with the barrier strike remaining at 65%.

But the market participant noted that his description of the structure was overly simplistic.

“In real life, people on the desk don’t buy and sell options. They price the probabilities using formulas. It’s done automatically on the computer,” he said.

Maturity outcomes

The main benefit of the step-down feature was to increase the odds of a call, said an industry source.

“The number one reason you would buy this is to increase the odds to collect your premium. You’re hoping to get called and get your coupon,” he said.

He said he liked the structure overall except in the case the notes do not get called.

“At maturity, you get paid 47% if you’re above 90% and that’s nice. But I don’t like the fact that you’re getting nothing between 65% and 90%.

“I’m used to snowballs where you get paid if you’re above the barrier level. You either get the coupon or you lose money. I don’t like that range between the barrier and the call strike where you only get your principal back. That’s a big range. For a client, it’s challenging to be locked up for five years and finish with 0% return at maturity,” he said.

For some however, the ability to earn the premium below par is worth the risk.

The notes will be sold via UBS’ private bank. The firm has a solid lead on the marketing of step-down autocalls, having priced similar products on the behalf of other issuers. Those include HSBC USA Inc., Citigroup Global Markets Holdings Inc. and GS Finance Corp., according to data compiled by Prospect News.

UBS Securities LLC and UBS Investment Bank are the agents.

The notes will price on March 28 and settle on March 31.

The Cusip number is 90279F5H0.

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