Credit Suisse’s $47.8 million autocallables on Euro Stoxx 50 popular for target return, buffer

By Emma Trincal

New York, May 27 – Credit Suisse AG, London Branch’s $47.8 million issue of 0% autocallable buffered notes due May 30, 2018 linked to the Euro Stoxx 50 index was the largest deal to price last week. Sources attributed the success of the offering to the demand for consistent returns in a choppy market on the part of certain investors.

The notes will be called at par plus a call premium if the index closes at or above the initial level on June 22, 2016 or May 23, 2017, according to a 424B2 filing with the Securities and Exchange Commission. The call premium is 8.6125% for the first call observation date and 15.9% for the second call observation date.

If the notes are not called and the final index level is greater than or equal to the initial level, the payout at maturity will be par plus a premium of 23.85%. If the index falls by up to 15%, the payout will be par. Otherwise, investors will lose 1.17647% for every 1% decline beyond 15%.

Defined return

“These kinds of deals have been happening for a long time. They are our bread and butter. We do these all year long, typically in longer maturities like six years rather than three years,” said Tom May, partner at Catley Lakeman Securities.

“Those autocalls can be quite good for people who do not really care about the benchmark. You can get your return even if the market is flat. As long as the market doesn’t drop, you get your 8% per annum.

“People like the concept of a target return. You know exactly what you’re going to get as long as the index does what you expect it to do.

“This is not for someone who needs to outperform the benchmark. People move in and out of asset classes to chase returns, and that’s fine. But for some investors, outperforming the market is not the main requirement. Pension plans, for instance, need defined returns. They want steady returns. They need the value of their portfolio to go up year after year. They don’t care if the S&P is up 15% or 20% in a given year. For them, the idea is, maybe I’m giving up some upside, but if I consistently make this 8% annual return, I’ll be happy with that.”

Rolling

By definition, autocallable structures can easily be shorter than the stated maturity. Statistically, the autocall is more likely to be triggered on the first call date than on later call dates.

The Credit Suisse notes, however, offered a term of at least one year as the first call date is after one year, he noted.

“Typically, buyers don’t care to be called. They want the annualized. They get called and they do another one.”

One issue, however, can be costs as investors have to pay a fee each time they roll into another deal, he noted.

The three-year Credit Suisse notes carried a 3% fee.

“It’s a lot,” he said.

“But even when the fee is high, as long as it is disclosed, investors may still be drawn to those autocalls.

“It depends on how much they value having a defined return.

“If they believe that 8% is better than chasing the market with its ups and downs, then chances are they will still want to buy the product.”

Buffered Euro Stoxx play

One other possible appeal of the deal was the downside protection, sources said.

The majority of autocallable notes that offer downside protection tend to deliver the protection through a barrier or trigger rather than a buffer, according to data compiled by Prospect News.

“There are plenty of dealers out there who won’t touch a barrier, so it may have sold well also because of that,” an industry source said.

“Ten, 15 or 20 percent buffer is usually pretty good with this type of duration and target return,” said a market participant.

Finally, investors have been bullish on the Euro Stoxx 50, a trend that picked up in momentum last year but has continued to strengthen as well this year. So far, U.S. agents have sold $3.13 billion of Euro Stoxx 50-based notes, a 36% increase from last year’s $2.31 billion as of May 27, according to the data.

“It’s a good trade, excellent underlying theme since the Euro Stoxx still has a lot of room to run and the U.S. and Chinese equities markets are at record levels and may not have much room to run,” the market participant said.

Sister trade

Deutsche Bank AG, London Branch priced a similar deal for $47.7 million last week. The underlying was the Russell 2000 index, but many of the terms such as the three-year tenor, the annual observation dates for the autocall and the 15% geared buffer were the same.

The deal, which also carried a 3% fee, priced at the same time.

“It’s hard to speculate on whether this was for the same client or not. I’m not sure about that,” the market participant said.

More certain was the fact that in both cases, it was a “brokered deal, not a for-fee account.”

The notes issued by Credit Suisse (Cusip: 22546VDQ6) and by Deutsche Bank (Cusip: 25152RF32) priced on May 18.

Credit Suisse Securities (USA) LLC and Deutsche Bank Securities Inc. were the agents for their respective offerings.

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