Credit Suisse's autocallables tied to five stocks offer high risk, potentially high return

By Kenneth Lim

Boston, Feb. 24 - A planned autocallable note linked to five stocks ties investors to the fate of the worst underlying performer, but it could attract investors who are neutral to modestly positive on the underlying shares, a financial adviser said.

Credit Suisse AG, Nassau Branch plans to price 10% to 12% contingent coupon autocallable notes due March 11, 2015 linked to the common stocks of Amazon.com, Inc., Apple Inc., Family Dollar Stores, Inc. and Intel Corp. and the American Depositary Shares of Vale SA.

The notes will be called on any quarterly observation date if each of the underlying stocks' closing price is at least 90% of its initial level.

If the notes are not called, on each observation date investors will receive an interest payout provided that none of the underlying stocks is below the knock-in price of 50% of its initial level. Otherwise, investors will not receive any interest for that quarter.

At maturity, investors will receive par and the final interest payout unless the notes are knocked in for the last observation period. In that case, investors will receive a number of shares of the worst-performing stock equal to par divided by the initial share price.

The exact coupon will be set at pricing.

Outperformance potential

The notes could offer investors an attractive return if the underlying stocks do not appreciate above the coupon rate or fall below the knock-in level, the adviser said.

"You could get a 10% or 12% annualized return as long as the stocks stay above 50%, which on the face of it is a pretty reasonable deal," the adviser said. "From 50% all the way to 110% or 112%, you're going to be outperforming the stock. In fact, you're going to get a positive return in that range, which is a good thing to have if the stock is negative. So if you don't think any of these stocks are going to go above 10% or 12%, this might make sense."

The coupon rate is particularly attractive in the current low interest rate environment, the adviser added.

"It's a very tempting number to look at because unless you venture quite far from risk-free assets and straight bonds, it's very, very hard to get that type of return," the adviser said.

Significant risks

But investors are taking on quite a bit of risk for the opportunity to grab that kind of a return, the adviser said.

First of all, investors might not see the full 10% to 12% return over four years. The longish tenor of the product works against investors because it is more difficult to predict what the underlying stocks will do that far out in time, the adviser said.

"If the stocks do well, you're more likely to get called and then you'll have to reinvest the money," the adviser said. "That's not that bad, actually, because you still get the full return. But if you don't get called, that means one of the stocks has been below 90% for a while, and your risk of getting knocked out is increased."

If any of the stocks gets knocked in, investors are also more likely to be stuck in a zero-yielding investment.

"You're not going to get called, and your money's stuck in this investment that doesn't pay you anything for four years," the adviser said. "That's not a good experience to have."

The notes are also linked to the worst performer of the underlying stocks, which works in the issuer's favor.

"Putting five different stocks there and linking the outcome to the worst performer is giving more options to the bank, not the investor," the adviser said.

The adviser noted that a 50% hurdle on the downside may seem like a lot, but equities have been volatile over the past few years.

"Where were all these stocks in March of 2009?" the adviser said. "I bet a few of them have doubled, or nearly doubled. Of course you can't extrapolate like that from historical prices, but I'm just pointing out that the volatility and the risk is there."

Buyers need confidence

The adviser said the selection of underlying stocks was puzzling and did not seem to follow an obvious theme, which could be a tough sell to retail investors.

"You have a couple of tech companies there, retail and one mining company," the adviser said. "Maybe there's a bit of a play on inflation, but at first glance I suspect there's very little correlation between them. That makes it harder for a retail investor to form a position on the product."

Investors who want to buy the product will probably have to be very familiar with the underlying stocks and be confident about making the bet, the adviser said.

"You really need to do the same amount of research as if you were buying the actual stocks," the adviser said. "All five of them. It's a lot of work for one investment."

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.