Credit Suisse’s $11.1 million autocallables on Celgene show deep barrier, low entry point

By Emma Trincal

New York, Dec. 13 – Credit Suisse AG, London Branch’s $11.1 million of trigger autocallable contingent yield notes due Dec. 11, 2020 linked to the common stock of Celgene Corp. offer a “reasonable” income play with a defensive barrier and a low entry point in a stock that has already dropped significantly and is now recovering, sources said.

Each quarter, the notes will pay a contingent coupon at the rate of 8% per year if the shares close at or above the coupon barrier, 61.5% of the initial share price, on the observation date for that quarter, according to a 424B2 filing with the Securities and Exchange Commission.

After six months, the notes will be automatically called at par of $10 if the shares close at or above the initial share price on any observation date.

If the notes are not called and the final share price is greater than or equal to the 61.5% downside threshold level, the payout at maturity will be par plus the contingent coupon.

Otherwise, investors will lose 1% for every 1% that the final share price is less than the initial share price.

Value play

“This is for somebody who needs income and I would think with a reasonable protection,” Scott Cramer, president of Cramer & Rauchegger, Inc.

October was a roller coaster for the stock. The share price fell from its 52-week high at $147.00 to its 52-week low at $94.00 in just about three weeks following the company’s earnings announcement.

The stock has since then recovered some of its losses. It closed at $108.20 on Wednesday.

Cramer pointed to the advantageous entry point.

“It really fell off a cliff. It’s institutionally owned by more than 80%. This stock is not that volatile,” he said.

The size of the barrier provides an additional level of safety, he noted.

The stock would have to drop another 38.5% from its current levels to breach the barrier, which is about $68, a level it has not fallen to since April 2014.

“That’s a huge drop.”

But the three-year tenor did not make such scenario impossible.

Volatile sector

“It’s a solid protection. But to be fair, the bio-pharmaceutical space can be very volatile,” he said.

“Three years is a long time in drugs stocks.

“If they kill or injure somebody, any of those stocks could fall apart. It could systematically go down over time.

“The main risk here is event risk.”

Autocallable

Cramer said he liked the 8% contingent coupon as a source of income.

But the duration of the product was uncertain due to the autocallable feature.

“You’re more likely to be called in six months and collect 4%,” he said.

This may not be the ideal scenario, but it certainly was the most probable.

“Chances are you’re getting called. Of course you would rather stay in the notes and collect your quarterly coupon for three years until maturity. Good luck with that,” he said.

Overall, this adviser said the notes offered good value to investors.

“It’s a decent income play, a way to receive income while mitigating some of the risk,” he said.

The art of the roll

Advisers and brokers run into “resistance” sometimes when a note gets called and the client wants exactly the same terms or better, a market participant said.

“Maybe they had 10% and they still want 10%. But they’re only getting 8%. Well, yes but they’re getting a barrier close to 60%. That’s a good downside protection,” this market participant said referring to the deal.

“You can’t reproduce the same coupons with rolls. Market conditions aren’t just the same.”

Investors seeking a 9% contingent coupon may have to settle for a 65% or 70% barrier, he said as an example.

“To me it’s preferable to get a reasonable coupon like 8% and have more protection.

“You can’t reproduce the same coupon with rolls without taking on more risk.

“Rather than stretching for yield with more risk, this deal gives you a 60% barrier. In my opinion, this structure achieves a pretty decent risk-adjusted return,” he said.

UBS Financial Services Inc. is the distributor.

The notes (Cusip: 22549D715) priced on Dec. 8.

The fee is 2%.

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