RBC’s contingent coupon barrier autocalls tied to Apple, Facebook offer bet on bulls’ darlings

By Emma Trincal

New York, Oct. 18 – Royal Bank of Canada’s autocallable contingent coupon barrier notes due Oct. 23, 2020 linked to the lesser performing of the common stocks of Apple Inc. and Facebook, Inc. offer a change compared to the abundance of worst-of deals tied to broadly diversified benchmarks. While the two technology mega stocks are part of most institutional portfolios and help push the market higher in a never-ending bullish momentum, investors will have to determine whether the protection amount is sufficient in the event of a trend reversal.

The notes pay a contingent quarterly coupon at an annual rate of 8% to 9% if each stock closes at or above its 65% trigger level on the observation date for that quarter, according to an FWP filing with the Securities and Exchange Commission.

The notes will be called at par if each stock closes at or above its initial level on any observation date beginning April 20, 2018.

The payout at maturity will be par unless either stock finishes below its 65% trigger level, in which case investors will be exposed to any losses of the worse performing stock.

Technology play

“The stocks are sector-correlated and this helps with the risk...but that said, a 35% drop is a major loss of principal if you hit the barrier,” said Andrew Valentine Pool, main trader at Regatta Research & Money Management.

“I would be very concerned with the downside on this one.”

Both technology companies have seen their share price skyrocket, he noted. Apple is up 42% and Facebook has gained 53% this year.

For Facebook, which went public in May 2012, the robust bull momentum has been consistent year after year. Since the IPO, the share price rose 5.5 times to $176, the closing price on Wednesday.

Apple has seen its price double during the same time.

Rich and strong

“An adviser should investigate what are the probabilities that one of the two stocks could drop 35%,” he added.

“There is plenty of downside risk given the huge run, especially with Facebook.

“If I was to put this trade in one of my charting programs the relative strength would be so high, I probably wouldn’t be able to put it in.”

The “Relative Strength Index” or RSI is a technical indicator designed to measure whether a stock is overbought or oversold. The higher the index, the more overbought the stock price is and therefore, according to this analysis, the greater the odds of a reversal.

More please

Another buysider was more inclined to look at the coupon, saying the notes may not offer enough upside.

“I don’t mind the structure. I don’t like the yield. I always like to compare a note with something else,” this buysider said.

He said that he could get an equivalent yield with a worst-of tied to the three “usual suspect” indexes, which are the S&P 500, the Russell 2000 and the Euro Stoxx 50.

“I’d rather take the risk on several major indices than on single-stocks,” he said.

Quality names

Downside exposure was not his main preoccupation however as he stated that both Apple and Facebook are solid blue chip names in the technology sector.

“If you were to throw in a Tesla and a Netflix, I would be more worried. And if it was a single-name like Valeant, it would be scary too. The underlying stocks in this deal are kosher. After all, Apple and Facebook make up all of the major indices.”

Negative headlines earlier this year cut by half the share price of Valeant Pharmaceuticals International, Inc. in just two months.

“I’m very comfortable with the downside in this deal. I just don’t think the yield is that attractive, but overall, I don’t mind the structure.”

RBC Capital Markets, LLC is the underwriter.

The notes will price on Friday.

The Cusip number is 78013GKE4.

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