Credit Suisse’s contingent coupon autocallables linked to three stocks show eye-popping yield

By Emma Trincal

New York, Aug. 8 – An autocallable contingent coupon deal linked to the least performing of three volatile stocks may seem like a far-fetched approach to income, but not when it pays nearly 22% a year, a financial adviser said.

Credit Suisse AG, London Branch’s contingent coupon autocallable yield notes due Aug. 12, 2025 are linked to the least performing of Apple Inc., Amazon.com, Inc. and Uber Technologies, Inc., according to a 424B2 filing with the Securities and Exchange Commission.

The notes will pay a monthly contingent coupon at an annual rate of 21.7% if each stock closes at or above its coupon barrier, 65% of its initial level, on the observation date for that period.

The notes will be called at par if each stock closes at or above its initial share price on any monthly trigger observation date beginning Nov. 7.

The payout at maturity will be par unless any stock finishes below its 60% knock-in level, in which case investors will be fully exposed to the decline of the least-performing stock.

Exciting yield

“I kind of like it. Where else are you going to get 22% a year? It’s a high equity return,” said Steve Doucette, financial adviser with Proctor Financial.

Each monthly coupon represents a 1.8% return, he noted.

“You’re getting more in one month than what the 10-year bond gives you after one year,” he said.

The 10-year Treasury currently yields 1.718%.

Early call

“If it was not an autocall, I would say it’s risky. But the chances of getting called right away are pretty high,” he said.

The “right away” is three months from the trade date. If the notes are called at that point, the return over the three-month period would be about 5.5%.

He conceded that holding the 10-year Treasury is a far less risky proposition than the notes.

But for Doucette, the coupon rate offered an attractive compensation, making the risk-adjusted return of the investment appealing.

Credit risk

He proceeded to review the risks involved with the securities.

Credit exposure and limited liquidity during the course of six years would be the first concern. Doucette tends to sell his notes on the secondary market. In this case, he may not even have to do so.

“It’s going to be called in three or six months unless we have a crash. And even if that happens, worst-case scenario you lose your coupon for a while. But you will get it back because 65% is a deep coupon threshold even for these stocks,” he said.

Principal repayment

Market risk is a concern if the notes never get called. Following the same logic (high likelihood of a call), Doucette said the odds of losing principal were small. In addition, the 60% principal-repayment barrier at maturity felt “pretty safe,” he noted.

Even in the event that the notes never get called, the long duration itself could be seen as a risk mitigator.

Six years

“We’re due for a bear market. But history shows that bear cycles do not last very long. The market will come back during that time,” he said.

“If the market comes screaming back, you don’t have too much downside risk here.

“Your risk is mainly on the upside. You’ll get called and therefore you may underperform the stocks. Maybe, maybe not.”

Finally, not getting paid the dividends was not a problem since two out of the three stocks (Uber and Amazon) do not pay dividends. Apple has a 1.5% dividend yield.

“It’s a pretty interesting note,” he said.

“I can see it as a cool hedge for people who own these stocks.

“You get called if they continue to go through the roof. And you build a nice cushion against your losses.”

For pros only

Jeff Pietsch, head of capital markets at the Institute for Wealth Management, was more circumspect.

The suitability of the deal was limited to experienced investors or short-term players, he said.

“It’s an interesting vehicle for short-term income with a healthy rate of return,” he said.

“If you’re a sophisticated investor or a hedge fund, it could be an attractive short-term strategy to generate yield.

“But I don’t think it’s appropriate for a retail investor.”

One reason is the complexity of worst-of payouts. In this case there are three underlying stocks rather than two, and those are single stocks, not indexes.

“It’s hard to model your risk when you’re dealing with three stocks given that your exposure is to the worst of the three. You have to take into account correlations and volatility. It makes it very difficult to predict the various outcomes,” he said.

“The fact that it’s autocallable makes the monitoring of this investment even more challenging. You have a lot of different moving parts. You don’t even know how long you’re going to hold the notes for.”

If it matures

Even if the notes are likely to be called, any investor would have to assume the risk over the six-year maturity.

“You can’t say that losing money at maturity is impossible even with a 60% barrier.”

Such risk cannot be underestimated.

“Uber is a new stock. It was a high-profile IPO in May, but there is no track record,” he said.

He spoke with Prospect News a few hours before the company reported its second-quarter results on Thursday. The earnings showed a $5.2 billion loss, pushing the share price down 12% after hours.

Richly valued

The structure offers no upside potential above the coupon. Investors are hoping the stocks will be trading in a range, he explained.

“You’re hoping the stocks will move sideways to down. It’s a short-term bet,” he said.

The bet can be risky as the stocks are trading near peak levels.

For the year, Apple is up 29% and Amazon, 22%.

Uber closed on Thursday 4.5% down since its IPO, but that was prior to the earnings announcement.

Reinvestment risk

An automatic call would not necessarily be a welcome event for Pietsch.

“As an adviser who wants to generate income, this is not the right vehicle. You’re going to incur reinvestment risk,” he said.

“It’s a lot of research to find high yield for your clients. But you can get called in three months and you have to do it all over again with potentially lower rates.

“I can see an adviser catering to high net-worth clients or a family office using the notes as a short-term yield-enhancement strategy. But I assume it’s a costly way to get income since you have to constantly roll the notes over.”

Credit Suisse Securities (USA) LLC is the agent.

The notes priced on Wednesday and will settle on Aug. 12

The Cusip number is 22552FSE3.

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