Credit Suisse’s autocalls on airline stocks tap into reopening theme

By Emma Trincal

New York, April 19 – Credit Suisse AG, London Branch’s 0% contingent coupon autocallable yield notes due Nov. 3, 2023 linked to the least performing of the stocks of Delta Air Lines, Inc., JetBlue Airways Corp. and Southwest Airlines Co. are designed for investors seeking income on the view that the post-pandemic recovery should limit the downside risk associated with the struggling airlines.

The notes will pay a quarterly contingent coupon at an annual rate of 12% if each stock closes at or above its coupon barrier, 60% of its initial level, on the observation date for that quarter, according to a 424B2 filing with the Securities and Exchange Commission.

The notes will be called at par if each stock closes at or above its initial level on any quarterly trigger observation date.

The payout at maturity will be par unless any stock finishes below its 60% knock-in level, in which case investors will be fully exposed to the losses of the least-performing stock.

Big names

Jerry Verseput, president Veripax Wealth Management, said he liked the structure despite the reinvestment risk.

“The 12% coupon is attractive. It’s a fairly attractive deal although it’s very likely to get called. But that goes with the territory when you buy those autocalls,” he said.

The adviser recently bought an autocallable note linked to the U.S. Global Jets ETF, which gives exposure to the global airline industry. The note was called early as the sector is booming.

“Those three stocks are major air carriers. They’re among the top five in the Jets ETF,” he said.

The US Global Jets, which is often used as a benchmark for the airlines industry, has returned 132% from its 52-week low of May.

The three stocks combined have a 25% weighting in this fund composed of 40 constituents.

“Perhaps JetBlue, which is more business-oriented, may have a little bit more trouble,” he said.

“But we already know that business travel has declined. That’s already priced in.”

Progress in sight

Verseput was optimistic about a recovery in the industry.

“Those major airlines companies have a pretty good tailwind with the economy getting back to normal,” he said.

This adviser said he was comfortable with the amount of downside protection.

“I don’t see any of those three stocks finishing down 40% with the tailwind of the post-pandemic recovery.

“Delta recently lost more than 10%. They may continue to go down a little bit but that’s a good thing. You don’t want all three stocks to be up and get called in three months. That’s a pain,” he said.

Delta

Carl Kunhardt, wealth adviser at Quest Capital Management, had a negative outlook on the airlines.

“I don’t particularly like this note. I have concerns about some of the underlying stocks. This is more of a gut feeling,” he said.

“The coupon doesn’t excite me.

“Despite the vaccines and the reopening of the economy, this industry has been bleeding cash for a year. I’m not very optimistic.”

Narrowing down his view on one of the three underlying, Kunhardt criticized the management of Delta Air Lines saying that it recently put politics ahead of the company’s financial interest.

“Their CEO jumped both feet into the Georgia voting law criticizing the state legislature. That’s a little bit crazy when you think they depend so much on the state.”

After the Georgia legislature voted last month a new and controversial voting reform, Delta’s chief executive officer Ed Bastian released a memo calling the new law “unacceptable.” The Georgia House of Representatives’ response was to vote a bill to strip Delta Air Lines of millions of dollars’ worth in tax breaks. The state Senate has not voted on the measure yet.

“For more than a year now, the airlines have been bleeding cash while trying desperately to fill their planes with passengers. They’re struggling to survive.

“When you’re getting these kinds of tax benefits during a pandemic, why would you bite the hand that feeds you?

“You don’t have to be political to realize how stupid that is.”

Distressed business

Kunhardt was also pessimistic about the profitability of the sector due to new trends.

“People are talking about the reopening of the economy. But do we have more airlines passengers? Yes and no. Yes, compared to last year but no compared to pre-pandemic levels. And I don’t think we’ll get to those pandemic levels any time soon,” he said.

Part of the problem was the unbalance between the two main revenue centers for airlines.

“The airlines are generating most of their profits from their business consumers,” he said.

“But more and more people are working remotely. Companies find out their workers like it. Companies like it too because they save a lot of money. Business travel is going to be drastically reduced.

“So even with summer ahead of us, I don’t think the number of recreational passengers who pay less is going to make up for the loss of business travelers who pay more.”

Coupon at risk

The structure was acceptable although the contingency of the coupon may represent a greater risk than usual due to the underlying stocks and the worst-of payout, he added.

“I’m comfortable with the 60% barrier at maturity,” he said.

“A 40% over two-and-a-half years is a pretty big drop. You’re likely not going to lose your shirt on this note.”

But the same barrier level observed for the interest payment each quarter may be breached from time to time, he noted.

“The coupon is more at risk. 12% sounds nice especially if you don’t expect high returns from the market. But you’re probably not going to make 12%. You’re exposed to the worst of three stocks. You’re going to miss some of the payments, in which case, you’re sitting there not making any money on the note. Meanwhile, you’re missing an opportunity in what should be a nicely improving market.”

The agent is Credit Suisse Securities (USA) LLC.

The notes will price on April 28 and settle on April 30.

The Cusip number is 22552XJS3.

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