Credit Suisse’s $1 million 31% autocallable notes linked to Twitter, Micron seen as too risky

By Emma Trincal

New York, Feb. 2 – Credit Suisse AG, London Branch’s $1 million of 31% autocallable yield notes due Feb. 1, 2017 linked to the common stocks of Twitter, Inc. and Micron Technology, Inc. are so risky, financial advisers said, that they would be hard-pressed to find a client willing to invest in the notes despite the eye-catching yield.

“It’s dangerous,” said Donald McCoy, financial adviser with Planners Financial Services.

He said the risk is amplified by two factors, the extreme volatility of both underlying stocks and the worst-of payout.

Interest will be payable monthly, according to a 424B2 filing with the Securities and Exchange Commission.

The notes will be called at par if each stock closes at or above its initial share price on any monthly observation date.

The payout at maturity will be par unless either stock finishes below its 75% knock-in level, in which case investors will be fully exposed to the losses of the worse-performing stock.

It’s not income

“Who is it for?” McCoy asked.

He ruled out the fixed-income investor as a potential candidate for the notes.

“It’s not really about income. You could find income more consistently somewhere else,” he said.

“Sure, you get called in two months and you made a little bit over 5%. That’s a nice gain. But you’re taking an incredible amount of risk with your downside being tied to two extremely volatile stocks.

“The coupon may be paid and guaranteed, [but] investors could still lose up to 100% of their principal at maturity.

“If one of the stocks is down 50% and the other lost only 10%, you end up losing 50% of your investment. You may have received a 31% coupon, but you lost 20% of your initial investment.”

This hypothetical return is not far-stretched, he noted.

Over the past 12 months, the share price of Twitter has dropped 57%. The stock closed at $16.08 on Tuesday, down 10.22% for the day.

Speculative

Micron’s performance is even worse. In one year, the stock lost nearly two-thirds of its value, down 64%.

The share price closed at $10.59 on Tuesday, down 3.38% from the previous close.

Perhaps a speculative, short-term investor may find the structure appealing due to the call feature, he said.

“I just can’t imagine finding one client for whom this would be suitable unless they have a time horizon of a couple of months.

“You would be constantly worried about what’s happening with the stocks.

“I guess you would be happy to be called. You’d get your 5% in two months or 2.5% after one month.

“It’s a way to generate a short-term profit. You try. You win. [If] you fail, you can lose your shirt.

“This is simply putting money down on a roulette wheel.”

The sizable coupon can be used to offset some of the losses, he conceded, but it is not enough to make the risk tolerable for his clients.

“You can argue that the coupon will offset some of your losses. It might be a reasonable argument if you only had to deal with one stock, but your fate is tied to the worst performer. And they’re both very volatile,” he said.

Unhedged

McCoy considered that investors are in a disadvantageous position in relation to the issuer.

“At least they can call the notes if the stocks are both up. If the trade turns against them, they preset the position. They’re hedged. If, on the other hand, the stocks are down, you’re stuck. You’re left holding the bag.”

McCoy went as far as saying that even speculators would not use the notes.

“Even if I was a gambling person, I can’t imagine doing this. The odds are in favor of the house.”

Not for bulls

Investors bullish on the two stocks may have an interest in the notes given the exceptionally high yield, but McCoy ruled out this possibility as well.

“If you’re bullish, why would you take unlimited downside risk for a return that’s capped at 31% a year?”

A trader could capture that kind of gain in a much shorter timeframe, he reasoned.

In roughly two months, between early February and early April last year, the share price of Twitter jumped 32.5%.

The bullish case may be even more compelling today as both Twitter and Micron trade at multi-year lows, he noted. Current entry points would make the notes even less enticing, he said.

A bull seeking to participate in the upside would be unlikely to buy the notes just for the automatic call, he said.

“If you’re bullish, you would expect to be called out. Why not buy the stocks directly?” he said.

“It just seems unnecessarily complex.

“If you’re going to reach for yield, you can find ways to do that with much less risk.”

Equity

Tom Balcom, founder of 1650 Wealth Management, was surprised by the yield, but he too was cautious.

“It’s too risky for my blood,” he said.

“It’s a great coupon, but there are a lot of moving parts there.

“You need both stocks to be above their initial price for the call. At maturity, if only one breaches the barrier, you lose the protection. You’re not getting an average return but the return of the worst stock. They’re both pretty volatile. If one is up 20% and the other is down 40%, you lose 40%.

“It looks attractive when you see that yield, but I’d be worried a lot about that investment.

“Why take so much risk for a limited upside?

“I wouldn’t do this for my clients.”

If one type of investor may consider the notes, it would have to be an equity investor familiar with the two stocks.

Someone who already owns the stocks may want to use the notes either as a hedge or as a recovery strategy, he said.

“Volatility gives you a very high premium. It looks like an amazing coupon, and it is, but I wouldn’t call it fixed income. There’s just too much risk in that note.”

Credit Suisse Securities (USA) LLC is the agent.

The notes (Cusip: 22546VVW3) priced on Jan. 28.

The fee was 2.5%.

© 2015 Prospect News.
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