Credit Suisse’ $3.23 million autocalls on VanEck Oil Services ETF offer short-term industry bet

By Emma Trincal

New York, March 23 – Credit Suisse AG, London Branch’s $3.23 million of contingent coupon buffered autocallable yield notes due March 23, 2023 linked to the VanEck Oil Services ETF provide a short-term play on oil services stocks for investors with a neutral view on this industry.

The notes will pay a contingent quarterly coupon at an annualized rate of 19.5% if the ETF closes at or above its 80% coupon barrier on the related quarterly observation date, according to a 424B2 filing with the Securities and Exchange Commission.

The notes will be called at par plus the coupon if the ETF closes at or above its initial level on any quarterly call observation date.

The payout at maturity will be par plus the final coupon if the ETF finishes at or above its 80% buffer level.

Otherwise, investors will lose 1.25% for each 1% decline beyond the 20% buffer, payable as a number of shares equal to $10,000 divided by the ETF’s buffer level or, at the issuer’s option, the cash equivalent.

Variety of options

A market participant said he was comfortable with the underlying.

“I like a bet on an energy ETF better than a worst-of on three oil stocks,” he said.

“This at least is a diversified ETF. It’s not like picking stocks.”

The VanEck Oil Services ETF replicates the return of the MVIS US Listed Oil Services 25 index. The index tracks U.S. companies involved in oil services to the upstream oil sector, which include oil equipment, oil services, or oil drilling. It is listed on the NYSE Arca under the ticker “OIH.”

“We’ve done XOP in the past. We haven’t done OIH,” he said. “XOP” is the ticker for the SPDR Oil & Gas Exploration & Production ETF, a larger equity energy fund.

“The correlations between the two are pretty high. I wonder which one would price better right now. The choice of an underlying ETF depends on a number of factors aside from pricing. Do people like to link to it? Do they have a view on it?”

Terms

This market participant said he liked the risk-return of the product.

“The 19.5% coupon is attractive,” he said.

“The geared buffer is nice given the volatility of where oil services are.

“We’re actually using the same concept on a deal not related to this one. Instead of the usual barrier, we’re actually doing a Phoenix autocall with a geared buffer.”

One caveat was the automatic call, which can be triggered on the first observation date.

“I would have favored a longer call period. I wouldn’t want to be called three months from now. Adding some call protection, maybe six months, would add a lot of value to this note. If it means extending the maturity, that’s OK. Three years is not so bad. We’re seeing a lot of issues with this kind of maturity.”

Rich fund

Andrew Valentine Pool, main trader at Regatta Research & Money Management, was comfortable with the terms despite the relatively high valuations in the energy sector.

“The two biggest holdings – Schlumberger and Halliburton – together are a third of the fund. These two are already up substantially for the past year,” Pool said.

He also noted the high volatility of the fund, which helps explain the high coupon.

Schlumberger gained 55% over the past 12 months while Halliburton jumped 79%.

When the deal priced on March 16, the ETF closed at $257.30, having already retraced from its 52-week high posted a week before at $306.19. Since then, the share price has already gained nearly 10% as it closed at $282.09 on Wednesday.

Neutral to bullish

“You’re not buying it at an ideal entry level,” he said. In August, the ETF’s 52-week low was at $164.41.

“But I think it’s still a decent note given the outlook for oil.

“I don’t see energy as well as energy services going down much in the next year.

“It could go either way, but I still like it. Energy may come down a little bit, but a lot of companies still need energy services.”

One advantage of buying an autocallable product is that investors can be neutral.

“You don’t need the fund to go up. You just need it to hold,” he said.

“Right now, our economy is firing on all cylinders. As long as people continue to drive and travel, energy prices should hold. Can they hold for another three to four quarters? I can see that as being possible.

“I do like the note.”

Credit Suisse Securities (USA) LLC is the placement agent.

The notes settled on Wednesday.

The Cusip number is 22550MZM4.

The fee is 1.25%.

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