Credit Suisse’s $3.52 million autocallables on Hilton reflect vaccination, recovery hopes

By Emma Trincal

New York, Jan. 12 – Credit Suisse AG, London Branch’s $3.52 million of contingent coupon autocallable reverse convertible securities due Jan. 13, 2022 linked to the share price of Hilton Worldwide Holdings Inc. are designed for investors expecting a return to normal in this upcoming year, an adviser said.

Interest is payable quarterly at an annualized rate of 11.65% if the stock closes at or above its coupon barrier, 75% of its initial level, on the related observation date, according to a 424B2 filing with the Securities and Exchange Commission.

The notes will be called at par if the share price closes at or above its initial price on any quarterly observation date.

If the notes are not called, the payout at maturity will be par unless the price finishes below its 75% knock-in level, in which case investors will receive a number of shares of the least performing fund 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.

Travel expansion

Tom Balcom, founder of 1650 Wealth Management, said the underlying investment theme was a play on the reopening of the economy.

“Obviously, with the economy reopening and the vaccines, people are going to fly and travel again. A lot of people are bullish on airlines, hotels and cruise ships based on this perception that we’re near the end of the pandemic,” he said.

“Travel is going to pick up. Hilton is a name that people recognize.

“If you’re optimistic about a return to normal, a 25% pullback is unlikely. This 75% barrier should be fine.”

On Tuesday, Raymond James upgraded Hilton, raising its price target to $125 from $105 and maintaining an outperform rating. The stock closed at $112.33 on Tuesday.

Airlines and oil

It’s less risky to be bullish on hotels and resort companies than betting on the airlines for those investors who expect a reopening of the economy, he said.

“Hilton is a pretty stable name. Airline stocks are more volatile,” he said.

“The recovery in the airlines industry doesn’t just depend on the relief we will get from the vaccines. It’s tied to oil prices. Oil is volatile. Right now, it’s at an 11-month high.”

High-yield replacement

Investors in the notes should be familiar with Hilton as it is always the case with single-stock-linked notes, he added.

“This note pays a high coupon rate for a reason. There is equity risk. This is not a pure fixed-income play,” he said.

The coupon is contingent, and the principal not guaranteed, he added.

“But an 11.65% yield is very appetizing, especially if you compare that with the one-year Treasury yielding 1%.

Balcom said he would put the notes in his high-yield portfolio.

The notes are not designed to replace equity.

“You’re not looking for growth here since you’re capped at the coupon level. This is an income play,” he said.

Timing

Steven Jon Kaplan, founder and portfolio manager of True Contrarian Investments, was more skeptical.

“The stock is at $112. If it goes back to its low of March of $44, it’s much more than a 25% drop,” he said.

“This deal isn’t coming at a great time.

“It’s not unique to Hilton. Everything right now is overpriced in the market. U.S. stocks are risky in my opinion.”

“In the last couple of months, there haven’t been any bargains. You don’t see significant price divergences.

“Back in March, in May and in October, you could get attractive prices in certain sectors – bank stocks, energy stocks, some emerging markets. Not anymore.

“Certainly, Hilton is not among the most overpriced names. But it has gone up a little bit too fast recently.”

The share price has gained 27% in the past three months.

Speculative script

“People are just listening to the call of the media. They go for the vaccine trade. In March, the media predicted that it would take a long time for the market to recover. Many people missed great opportunities back then as a result. The media get it wrong most of the time,” he said.

Hilton rose almost three-fold since the March pullback. But the bulk of the appreciation took place in the last two months of last year, he noted.

“In the early part of the gains, the stock rose because it was undervalued. But since October, the driving force behind this accelerated rally has been speculation.

“That’s why I wouldn’t feel confident with the 75% barrier. It’s not enough downside protection. If you revisit the low of March, you get to lose a lot of your principal, more than 60% of it.

“You hope it won’t go down as low as it was then.

“But everything can go back to where it was the previous year,” he said.

Citigroup Global Markets Inc. is the agent.

The notes will settle on Wednesday.

The Cusip number is 22550MNT2.

The fee is 1.25%.

© 2015 Prospect News.
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