UBS last week launched a retail equity-linked investment in Hong Kong that incorporates a decreasing call strike feature. "This is a first for a public launch," said Ferdinand So, director in the equity risk management group at UBS in Hong Kong.
Dubbed Variable-Expiry Range Accrual Equity Linked Investment and referenced to local blue chips HSBC and Hutchison Whampoa, the structure contains a range accrual feature, whereby a quarterly payout is accumulated for every day the laggard share closes above the initial stock price level. The maximum potential quarterly return is 4.125%. The transaction has a maximum two-year maturity, with an autocall feature. If the laggard share is greater or equal to the initial strike level on quarterly observation dates, the structure will be redeemed early. So noted that after the third quarter, the strike level will be reduced from 100% by 1% on a bi-quarterly basis, reaching 97% by the end of the term. "This increases the chance of early redemption for our clients," he explained. A one-off bonus of 4.125% will also be paid at the end of the first quarter if the lagging shares' price is above 10% of the initial strike level, which the firm believes is highly likely. If the product does not terminate early, the investor receives shares of the least performing stock at expiry.
The structure is termed as an ELI rather than an equity-linked note as there is no guaranteed return of principle at maturity. "The risk appetite has been increasing and clients have been looking for higher returns than those provided by capital-guaranteed products," said So. The transaction closed as DW went to press but So noted that with a minimum investment of USD10,000, the firm is targeting USD10-30 million for the first run. He continued UBS plans to follow up with similar structures early next year.
