(Bloomberg) -- UBS Group AG is mandatorily redeeming two leveraged exchange-traded notes tied to mortgage real-estate investment trusts, according to a March 17 statement from the bank.
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 $5 minimum share value Monday, according to the statement. Combined, the notes had a market capitalization of about $30 million on Wednesday.
The ETNs made leveraged bets on an index of mortgage REITs, and each had lost more than 95% of their value over the past month.
A Bloomberg index of 37 mortgage REITs plunged almost 24% Wednesday, with some, like New Residential Investment Corp. falling more than 40% as investors grew more concerned about the prospect of a global recession stemming from the coronavirus.
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% of their taxable earnings to shareholders as dividends and, in exchange, don’t have to pay federal income taxes on those earnings.
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