Slumping oil prices have claimed at least two more victims. In this case, we’re talking about a pair of leveraged exchange traded notes (ETNs) tracking master limited partnerships (MLPs).
On Wednesday, UBS Investment Bank said it will close the ETRACS 2xMonthly Leveraged Long Alerian MLP Infrastructure Index ETN (NYSEArca: MLPL) and the ETRACS 2x Monthly Leveraged S&P MLP Index (NYSEArca: MLPV).
MLPV “will be mandatorily redeemed in accordance with the terms of the Securities as a result of the occurrence of an Acceleration Event, triggered as a result of the intraday indicative value of the Securities being equal to or less than $5.00 on January 20, 2016,” said UBS in a statement.
Once beloved income-generating asset classes, master limited partnerships and sector-related exchange traded products have tumbled in unison with oil and natural gas prices last year, a theme that has extended into 2016. Investors are worried that a traditionally attractive dividend-paying asset would no longer be able to maintain its steady payouts as U.S. oil output starts to decline after the steep drop-off in crude prices. In the recent crude oil sell-off, investors did not distinguish MLPs from other energy-related assets and dumped the asset as crude oil prices plummeted.
The closure of MLPL can be seen as a surprise because that ETN has over $100 million in assets under management and it is rare that exchange traded products of that size close. However, rapid price erosion forced the close of the two ETNs.
“The net asset values of both ETNs appear to have fallen so far, so fast, that each hit triggers that allow the bank to automatically accelerate redemptions for notes that were set to expire in 2040 and 2045,” reports Chris Dieterich for Barron’s.
MLPV “will be mandatorily redeemed in accordance with the terms of the Securities as a result of the occurrence of an Acceleration Event, triggered as a result of the intraday index value decreasing by more than 30% from the most recent Monthly Initial Closing Level (as defined in the prospectus supplement relating to the Securities) to below 349.81 on January 20, 2016 (the “Acceleration Date”),” said UBS in a separate statement.
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