BNP Paribas' step-up autocallables tied to Euro Stoxx 50 seen as innovative bullish structure

By Emma Trincal

New York, Nov. 7 - BNP Paribas' 0% step-up autocallable notes due Nov. 29, 2016 linked to the Euro Stoxx 50 index apply new features to an autocallable structure and give a wide range of bullish investors a chance to either secure income or outperform the index, said Steve Doucette, financial adviser at Proctor Financial.

The notes will be automatically called at par plus a call premium if the index closes at or above the initial index level on Nov. 25, 2014 or Nov. 24, 2015, according to a term sheet. The call premium is expected to be 10% per year.

If the notes are not called and the final index level is greater than or equal to the initial index level, the payout at maturity will be par plus the greater of the index return and the contingent minimum return, which is expected to be 33.5% to 36.5%.

If the final index level is less than the initial index level, investors will have 1-to-1 exposure to the decline.

The exact call premium and contingent minimum return will be set at pricing.

Wide range of bulls

"This adds more value than the typical range-bound leveraged note with a cap that limits your upside. It's also more sophisticated than the average autocallable that gives you no participation in the index," Doucette said.

"This is for a bull who doesn't think there is any downside risk three years out."

Investors in the product need not be "super bullish," he noted, as "you can make money even if the index doesn't go up, as long as it doesn't drop" on the observation dates and at maturity.

"You have to expect the market to be up, not down. The index can even be flat ... either up or flat. You just can't be a bear, that's all. So that's a structure that can be used to express a wide range of views and by a variety of investors," he said.

"If the market is only up 1% for the three years, you can capture the minimum return of 11% a year. If it's up a lot, you have the index without a cap. So it works for both the mildly bullish and very bullish investor."

The 11% annualized return is based on an assumed 33% contingent minimum return, which is approximately at the lower end of the range.

Likely call

Investors can make money in two ways, he said. The autocallable feature is designed for income while the maturity payout can be appealing to growth investors. The "scary part," he said, is "timing," as "no one knows what the market will be like in three years."

The autocallable scenario is perhaps the main incentive for most investors, he said.

"What's going to happen is that you're going to try to capture 10% on year one. If you don't get called, nothing happens, you just hold the note. That's the hard part here. You have to have a view on where the market is going to be in three years because at the end, there's no downside protection," he said.

"It gives you a chance to capture a good return with the 10% coupon or to outperform the market at the end if the growth is less than the minimum return of 11% annualized. Finally, you can also capture the entire gain since there's no cap, just a minimum return.

"As long as you're not worried about the downside, this is a great product for bulls.

"I love the concept. It's just a matter of timing it.

"Normally, we buy these autocallables as bond substitutes. This is an equity substitute because you're fully exposed to the downside risk."

Innovative

The notes feature an "innovative" structure, he said.

Traditionally, autocallables are capped at the call premium. With this product, he noted, investors have a chance to fully participate in the upside. The step-up also enhances the return, offering investors the possibility to beat the benchmark, he added.

"You have the call scenario for the income or the potential growth at the end without a cap. You have the minimum return. It's a 'best of.' I haven't seen best of used in autocallables before, have you? And in general, how often do you see them?

"BNP has been coming up with new concepts while other issuers are just copying what's already out there because it's really a new concept," he said.

Matt Medeiros, president and chief executive of the Institute for Wealth Management, pointed to the upside risk.

In his view, the early redemption scenario could hurt the more bullish investors, leading them to underperform the index.

Upside risk

"In light of the move the ECB is making by cutting interest rates, I like the Euro Stoxx 50. I am being more optimistic on the region given the news," Medeiros said.

The European Central Bank unexpectedly cut rates on Thursday in order to stimulate the euro zone economy.

Bulls expect the easing monetary policy to lift up stock prices in Europe while other investors have shown concern about deflation in the euro zone. Medeiros said that he shared the bullish outlook.

"Because I'm pretty bullish on Europe, I'm not too keen on the autocallable portion of the deal," he said.

"If a year from now the Euro Stoxx is up 15%, you're getting called at 10%.

"It takes almost nothing to get called. All it takes is for the index not to be lower.

"I see some upside risk with a strong probability of getting called after just one year."

Medeiros agreed about the novelty of the structure.

"It's a bit different because you're not necessarily capped. If you're not called, you can get the full index return. You can also get the minimum return even if the market growth is sluggish. But the odds of not getting called are just too slim from my perspective, which makes these benefits less likely to kick in," he said.

Investors getting full downside exposure should also get equity returns, he said.

"While it's true that the no cap and the step up reward you for taking on all the downside risk, it's only going to happen if you don't get called. If you do, you're capped out at 10%," he said.

"I don't believe you're going to hold the notes for three years. Your return is not going to grow like a hockey stick."

BNP Paribas Securities Corp. is the agent.

The notes are expected to price Nov. 26 and settle Nov. 29.

The Cusip number is 05574LSJ8.

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