Credit Suisse’s contingent coupon autocalls on Netflix show high headline rate on single name

By Emma Trincal

New York, March 4 – Credit Suisse AG, London Branch’s contingent coupon autocallable yield notes due March 8, 2021 linked to Netflix, Inc. shares offer an attractive double-digit potential return on a single-stock paper, said Matt Rosenberg, sales trader at Halo Investing.

The notes will pay a contingent monthly payment at an annualized rate of 13.35% if Netflix stock closes at or above its 70% coupon barrier level on an observation date for that month, according to a 424B2 filing with the Securities and Exchange Commission.

The notes will be called at par if the stock closes at or above its initial level on any review date.

The payout at maturity will be par unless the shares close below the 70% knock-in level, in which case investors will lose 1% for each 1% decline.

Fewer single stocks

“We haven’t seen many single-stock names to start the year,” Rosenberg said.

“We’ve seen the FANGs in baskets, yes, but not so much individual names.”

The acronym “FANG” stands for “Facebook,” “Amazon,” “Netflix” and “Google” parent Alphabet.

He said he liked the notes in large part due to the underlying.

“Netflix is one of the more popular single stocks used in structured products. This note shows a strong and appealing yield, which you usually see in worst-of,” he said.

“For investors, having a double-digit return on a single name is very attractive.”

Some (and very few) single-stock deals pay a fixed rate. In this case, the coupon is not guaranteed, he noted.

Investors will get paid only if the stock price closes above the 70% coupon barrier on the monthly observation date.

A 30% decline in the share price of Netflix is not uncommon. It occurred for instance between July and mid-November of last year.

“But you get paid for the risk of not getting paid. The contingency of the coupon is a yield-enhancer. If you were to price the same deal with a fixed rate you would get 9% instead of 13.35%,” he said.

Lower volatility, coupon

The deal may also be attractive for income-seekers who have noticed a recent drying up of the supply of autocallable offerings.

“There’s definitely been a drop in autocalls on stocks. I don’t know what the reason is for it. The majority of the flow is coming from people playing ETFs and indices,” he said.

The market has been rallying since the beginning of the year, which is not always a positive for income-structures which short volatility, he noted.

“The market was up in January and investors held off buying structured products. In February, they saw that the market continued to drip upward. We’ve only seen a ramp up in activity in the last week of February.”

When volatility spikes as it did in the last quarter, coupons become more attractive. It has not been the case in the first two months of the year, he said. The CBOE Volatility index has dropped to lows not seen since October prior to the market sell-off.

“Right now, volatility is lower,” he said. “People don’t really have the incentive to focus on a single name and be tactical. It doesn’t pay to be tactical. They compare what they used to get. Terms of those autocalls are definitely not as attractive as they used to be at this time last year.”

The S&P 500 index moved in correction territory last year in February and most of March.

“Right now, investors are doing more core holdings. They’re investing on indices using leverage, defining their outcome and protection. Autocallables are not the main focus.”

Things could change if the market became more volatile again.

“I think it’s just a matter of time. We’re not seeing many stock deals right now. But the market may change and pricing conditions could improve.”

Incapital LLC is the agent.

The notes will price on March 5 and settle on March 8.

The Cusip number is 22551LZK9.

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