Providers of reverse convertible and turbo certificates linked to the UBS share are expected to deliver losses to clients this month, after last week's arrest of a rogue trader in its global synthetic equities business in London almost halved the bank's share price compared to its strike level a year ago. In the retail market such products are mostly issued and listed in Switzerland.
A Commerzbank structurer privately told SRP that all eyes are on UBS's call options and few issuers will include it in their structures until the price stabilises: "The volatility of the share is making it more expensive to use," he said.
He also said investors will either unwind their products and take the loss, or approach issuers for a restructuring of the product. "The UBS share is still attractive depending on your market view. You can still go cheap on the share and offer attractive ideas, like a capital protected callable with 100% or 120% participation."
SRP data shows dozens of leverage short/long certificates and reverse convertible notes linked to the UBS share have lost between 35% and 60% of their initial value, and will not pay any coupons when they mature.
There are also 23 Swiss products maturing from the beginning of this week to the end of September that raised an estimated CHF100m ($112m) and will not be paying any returns. Nineteen of these have already matured, including an EFG Financial Products Barrier Reverse Convertible that made estimated losses of over 28%, while Vontobel, Commerzbank and Julius Baer have had reverse convertibles maturing this week with barriers between 21% and 35%, not enough to protect capital from the 50% to 60% fall in the UBS share compared to the strike values on these products.
Meanwhile, at least four products with maturity dates next week have all had their protection barriers broken after the UBS share lost over 50% value compared to their initial levels. JPMorgan's 3M Barrier Reverse Convertible was priced in June 2011 at CFH18.26 and had a -21 barrier, while Vontobel's Defender Vontis, Clariden Leu's 10.25% Barrier Reverse Convertible and Basler Kantonalbank's Barrier Reverse Convertible on UBS were all priced in September 2010 at CHF18.11 and had their respective downside barriers set at 35, 31 and 25.
SRP data also shows that most of the 75 products that have matured since the beginning of September incurred losses as a result of the cash conversion into shares following the breach of their barriers, although 12 Citi Turbo Bull certificates with a one-month tenor delivered positive returns as they were priced in August at between CFH7 and CFH10.5.
Scoach performance data accessed by SRP shows negative performances of products featuring the UBS share during the first two weeks of September saw losses of between 5.9% (Goldman Sachs' 1 Year CHF 10% Multi Barrier Reverse Convertible Certificates) and 25.41% (Julius Baer's Triple ICE Units with Knock-In).
Observers say it is unlikely the UBS share price will recover to its strike level for most structures issued a year ago. There are over 175 structures due to mature between October and December with an estimated value of over €450m featuring the UBS share in the underlying.
German providers face a similar problem: over 160 products linked to the UBS stock due to mature from September onwards will provide negative returns.