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UBS to redeem 2 leveraged ETNs tied to mortgage Reits

Zurich

UBS Group is mandatorily redeeming two leveraged exchange-traded notes (ETNs) tied to mortgage real-estate investment trusts (Reits), the bank has said in a statement.

The firm will redeem two series of the "ETRACS Monthly Pay 2xLeveraged Mortgage REIT ETN, tickers MORL and MRRL", after the notes fell below a US$5 minimum share value on Monday, according to the statement.

Combined, the notes had a market capitalisation of about US$30 million.

The ETNs made leveraged bets on an index of mortgage Reits, and each had lost more than 95 per cent of their value over the past month.

A Bloomberg index of 37 mortgage Reits plunged almost 24 per cent on Wednesday, with some, like New Residential Investment Corp, falling more than 40 per cent as investors grew more concerned about the prospect of a global recession stemming from the novel coronavirus pandemic.

Mortgage Reits are essentially leveraged bond or loan funds that invest primarily in real estate debt, making them more similar to fixed-income funds than to standard Reits, which own properties such as shopping malls, office towers and apartment buildings.

Mortgage Reits use short-term financing to buy commercial and residential mortgage securities, then add borrowed money - typically about three to nine times the amount of their own capital - to boost returns.

Like other Reits, they must pay out at least 90 per cent of their taxable earnings to shareholders as dividends and, in exchange, do not have to pay federal income taxes on those earnings. BLOOMBERG