Credit Suisse’s $3 million autocalls show fixed rate but dispersion risk with four stocks

By Emma Trincal

New York, Dec. 16 – Credit Suisse AG, London Branch’s $3 million of 8% autocallable reverse convertible securities due Dec. 16, 2022 linked to the least performing of the shares of Bristol-Myers Squibb Co., FedEx Corp., Alphabet Inc. and Charles Schwab Corp. offer a fixed coupon, an advantageous feature for investors, but the use of four different stocks in four distinct sectors bring additional risk, sources said.

Interest is payable monthly.

The notes will be called at par if the shares of the least performing stock close at or above its initial price on any monthly observation date after six months.

If the notes are not called, the payout at maturity will be par unless any of the stocks finish below its 56% knock-in level, in which case investors will receive a number of shares of the least performing stock equal to $1,000 divided by the initial share price or, at the issuer’s option, an amount in cash equal to the value of those shares.

Different market views

Brady Beals, director, sales and product origination at Luma Financial Technologies, said that the intriguing part of the deal was the underlying.

“It’s a strange choice of stocks. Some like Alphabet are the stay-at-home stocks that did well during the pandemic,” he said.

“Bristol Myers is clearly the opposite...it’s a bet on the recovery.

“There are divergences. That’s what makes it interesting.”

Yield first

Products get built based on clients’ requests. This may explain the odd 56% barrier level, he said.

“The client probably had a fixed amount in mind. That led the issuer to set the barrier next as a result of that coupon amount,” he said.

The risk is in having four stocks instead of one, he added.

“But those stocks are pretty established names. You could get a much higher coupon with a volatile stock, a biotech or tech name for instance. Here the client probably felt good about those well-known names. They got an 8% fixed rate, which is pretty good.”

“You have the worst-of risk, but these are blue chip stocks.”

It’s a numbers game

An example of a similar structure based on a single stock yielding a much higher coupon is Morgan Stanley Finance LLC’s $3.33 million of contingent income autocallable securities due Dec. 13, 2023 linked to Moderna, Inc., according to a 424B2 filing with the Securities and Exchange Commission.

Each quarter, the notes will pay a contingent coupon at an annual rate of 26% if the stock closes at or above its downside threshold barrier, 50% of its initial level, on the determination date for that period.

The notes will be called at par of $10 plus the contingent coupon if the stock closes above its initial level on any quarterly redemption date.

The payout at maturity will be par unless the stock finishes below its 50% downside threshold, in which case investors will be fully exposed to any losses of the stock.

“This is on Moderna. It’s a single stock but a volatile one. I’m not surprised the coupon is much higher,” he said.

Blue chips vs. indexes

A market participant noticed that using stocks instead of indexes gives investors a chance to get a higher and fixed coupon.

“It’s a very interesting deal,” he said.

“What I like about it is that the companies are companies people are familiar with.

“The fact that you have a fixed rate as opposed to a contingent coupon is also helpful. The 8% coupon is competitive in this market.

“It could be difficult to price an 8% fixed coupon with indices. You could, but chances are the coupon would have to be contingent and it would still be difficult to do it with the high degree of protection, the 44% protection, that you’re getting here.”

However, the number of stocks was a concern since the chances of dispersion between the respective performance is greater, he noted.

Correlations

“You have a number of positive things in this note,” he said.

“The only risk is that it’s four stocks.

“It used to be two, three. But when you go for four, you make the product riskier.

“The more stocks you have, the higher the risk even though these are four blue chips.”

In addition, the correlations between the underlying stocks are not high, which is also a risk factor, he noted.

On a scale of zero to 1, the highest correlation at 0.59 is between Alphabet and Bristol-Myers. The less correlated stocks are Charles Schwab and Bristol-Myers with a coefficient of correlation of 0.3.

“Possible divergences in performance is an issue. It has to be taken into account when considering the notes,” he said.

Credit Suisse Securities (USA) LLC is the agent.

The notes settled on Wednesday.

The Cusip number is 2550MMK2.

The fee is 3.1%.

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.