Wells Fargo’s $50 million contingent coupon callables on five tech stocks offer high premium

By Emma Trincal

New York, Oct. 3 – Wells Fargo & Co. priced $50 million of market-linked securities due Sept. 30, 2021 – callable with contingent coupon and contingent downside linked to the lowest performing of the class A common stocks of Alphabet Inc. and Facebook, Inc. and the common stocks of Amazon.com, Inc., Apple Inc. and Microsoft Corp., according to a 424B2 filing with the Securities and Exchange Commission.

The notes will pay a contingent quarterly coupon at an annual rate of 20.7% if each stock closes at or above its 70% coupon threshold on the observation date for that quarter.

The notes will be callable at par on any payment date after six months.

The payout at maturity will be par unless any stock finishes below its 70% downside threshold, in which case the payout will be par plus the return with full exposure to any losses to the worst performing stock.

“In my eyes, this deal is attractive. A 20% coupon in this environment is captivating,” said Matt Rosenberg, sales trader at Halo Investing.

“It’s also a straightforward structure on tech names everybody is very familiar with.”

Call premium

One of the reasons the issuer was able to generate the high premium was the call feature, which, unlike the common autocall, is exercised at the discretion of the issuer.

“Those issuers’ calls are growing in popularity,” he said.

“We’ve found that for index-based notes, people who previously were not interested in issuers’ calls are now open to doing it, especially if it offers them better terms or allows them to get more protection.

“I typically see them for index deals. It’s interesting to see it on stocks.”

The difference in yield between the automatic and the discretionary call can be significant.

“You can easily get an additional 100 basis points,” he said.

“People are starting to see that it’s a way of getting better yield.”

The $50 million notional suggested that investors found the high yield worth the risk associated with a worst-of deal involving five different securities, along with the callability, he noted.

“We’ve found that a lot of the time callable and autocallables get called at the same time anyway,” he said.

“It’s going to be based on the underlying performance.

Based on the size of this deal, the issuer may be inclined to hold on to the notes longer, he added.

“It represents a bigger chunk of their funding,” he said.

Risks

For a market participant, the high coupon was just reflection of the risk.

“If investors want higher returns they must take more risk! And this deal offers plenty of it,” he said.

The call option to begin with had a price.

“With these kinds of deals showing such high coupons, the call is going to be mostly driven by the stock.”

“They’re not going to call you if one of the stocks is down more than 30%.”

Investors may be tempted to buy the notes in the hope of getting called after six months with a 10% return.

“That’s the easy way to start the ride. But what about what happens in the next two-and-a-half years?”

“If a stock is down 50% in one year, do you think it will go back up enough in the next two years?

“You’re the one taking the risk for three years. If you win, they’ll call you out.”

Five stocks

The underlying and the structure added their own layer of risk.

“You can get a really good yield. You just have to pick volatile stocks like these technology stocks,” he said.

“Also the worst-of allows them to pay you such a high coupon. But it’s not a worst of two indices or two stocks. It’s a worst of five stocks.”

It came as no surprise that the issuer would have to use so many stocks in the structure.

“I don't recall seeing such high contingent coupon with worst-of based on three stocks before...so it kind of makes sense,” he said.

This market participant clarified his view, saying that he did not mean to suggest the deal was a “bad” deal.

“It’s just a pretty huge coupon and it comes with a lot of risk.

“You can get a 21% coupon. You can also lose a lot of money.”

Wells Fargo Securities LLC is the agent.

The notes (Cusip: 95001BA46) priced on Sept. 24.

The fee is 0.6%.

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