Credit Suisse’s $10.05 million autocallables on Euro Stoxx 50 offer variety of payout outcomes

By Emma Trincal

New York, Feb. 24 – Credit Suisse AG, London Branch’s $10.05 million of 0% autocallable market-linked step-up notes due Feb. 23, 2018 tied to the Euro Stoxx 50 index give investors several opportunities to get paid, including two call premiums during the life of the notes or, if the notes mature, a step-up payment or a long exposure to the index, sources said.

The notes will be called at par of $10 plus a call premium of 12.8% if the index closes at or above the initial level on March 4, 2016 or 25.6% if it closes at or above the initial level on Feb. 17, 2017, according to a 424B2 filing with the Securities and Exchange Commission.

If the notes have not been called and the index finishes at or above the initial level, the payout at maturity will be par plus the greater of the step-up payment and the index return. The step-up payment is 35%.

If the index finishes below the initial level, investors will share in the decline.

“This is an interesting note if one seeks Euro stock exposure,” said Dean Zayed, chief executive of Brookstone Capital Management.

The autocall mechanism is the piece of the structure that offers the best value in a shorter amount of time.

Risk ends with call

“I have warmed up to the autocallable feature as it is another favorable, transparent term that always results in the client getting paid and not losing,” he said.

Once the notes are called, investors receive their principal back plus the premium, he explained.

“Principal is never lost on a call. It’s tough to argue with that. Ironically, my clients that have had notes called are usually disappointed since they typically had enjoyed the terms of the notes until then and sometimes there is not a substantially similar one they can replace it with at the time of the call,” he said.

The annual call dates are also attractive. But for those missing the two call opportunities, the final payout either enhances the return or offers a long exposure to the index without a cap depending on where above the initial index level the index finishes, sources said. On the downside, however, investors do not benefit from any protection.

Several wins

“This note favors any result that is positive for the underlying, and you get two opportunities to earn interest before you could potentially lose,” he said.

“If you are even mildly bullish on Europe or want to make a tactical allocation to it, this note can work well in terms of upside performance. Of course, if the goal is to protect some principal, then this will not work.

“Ultimately, it is the autocallable feature that gives the investor multiple chances at earning interest without losing principal here that makes it attractive. If it was just a three-year point to point, I would not be as favorable on this.”

The Euro Stoxx 50 index offers a high dividend yield of 3.77%, which allows structurers to offer competitive terms since noteholders do not receive dividends, sources said. Investors in the notes forego nearly 12% worth of dividends over the life of the deal.

“Yes, they don’t receive the dividend. It’s simply built into the pricing,” Zayed said.

Short volatility

Jonathan Tiemann, president of Tiemann Investment Advisors, LLC, said investors buying the notes would have a very specific expectation of the index price moves.

“If someone wants exposure to the Euro Stoxx index but thinks volatility is overpriced, if they want to be in but expect only modest moves, then it’s something they may consider. Otherwise, your best option is to buy the index because you get the dividends, which may cushion your losses if the index drops at the end,” he said.

The notes, he added, are not easy to explain to a retail investor given the multiple payout scenarios.

“I’m not enthusiastic about the fact that you have a lot of different outcomes, which makes the product difficult to evaluate, particularly for the retail investor. You can be called on the first year, called on the second year, not get called at the end and lose money or get the step up or just be long the index. There are a lot of different scenarios.”

What makes the notes better than just buying the index is always how Tiemann begins analyzing any structured note, he said.

“It’s better than the index if you think volatility is overpriced and that European stocks are not going to go anywhere.

“If you don’t expect the market to soar and don’t see it going down, then you’re not going to miss out on a big bump out. The step up may actually bump up your return and allow you to beat the benchmark if it’s really flat.”

Dividends

Separately, Tiemann considered the opportunity cost represented by the non-payment of dividends.

“It’s a pretty rich yield, and you’re not going to receive dividends, unlike investing in the index,” he said.

“I’m not saying you’re going to underperform the index because of that. It totally depends on a number of factors.

“Say I get called on the second year and the market is up by only 5%. Overall, I give up 7.5% in dividends and 5% in price appreciation, but I am way ahead of the game. I made 25.6% with the premium.

“So you can certainly outperform the index fund. But not getting paid the dividends does not work in your favor and makes it a little bit harder.

“It’s also a bit harder to analyze. The range of positive outcomes is limited.

“The advantage is that you’re not necessarily taking huge risk. It’s not like selling naked put options. If the market is down 10%, you get 90 cents on your dollar and you’re also in the hole relative to the index by the amount of dividends. But it’s not like you’re going to lose twice the change on the index. It’s not a leveraged strategy where your losses are amplified.”

The notes (Cusip: 22539W749) priced Feb. 19.

BofA Merrill Lynch is the underwriter.

The fee is 2%.

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