Credit Suisse’s Phoenix autocalls on S&P draw heavy bid for rare buffer

By Emma Trincal

New York, March 31 – Credit Suisse AG, London Branch’s contingent coupon autocallable buffered notes due April 6, 2026 linked to the S&P 500 index drew interest in part for the buffer, according to a buysider. The deal priced at the close on Thursday at a notional of $56.83 million, he said.

The notes will pay a contingent semiannual coupon at an annual rate of 8.25% if the index closes above its coupon barrier, 80% of its initial level, on the related observation date.

The notes will be automatically called at par if the index closes at or above the initial index level on any semiannual observation date after one year.

The payout at maturity will be par plus the final coupon unless the index finishes below its 80% buffer level, in which case investors will lose 1.25% for every 1% decline of the index beyond the buffer.

Chicken Phoenix

“These Phoenix autocalls with a buffer are getting a lot of attention,” the buysider said.

“We call them chicken Phoenix. They’re great.

“We did a similar one with Citi earlier this month. This is our second one.”

He was referring to Citigroup Global Markets Holdings Inc.’s $20.05 million of four-year autocallable contingent coupon notes tied to the S&P 500 index, which priced on March 2. At the time, the semiannual contingent coupon priced at 7.45% per annum. The other terms (80% coupon barrier and 20% geared buffer) were the same.

“Having a buffer on an autocall instead of the typical barrier is very popular. People want to see more,” he said.

Pricing the terms with a sharp volatility drop in March was challenging for the issuer, especially for that offering size, he said, adding that the deal was pre-hedged.

The VIX fell 45% from 37.5 on March 8 to 20 on Thursday.

Straightforward

Scott Cramer, president of Cramer & Rauchegger, Inc., agreed that the buffer made the notes particularly attractive for defensive investors. He also liked the coupon rate.

“It’s a pretty straightforward structure on one index. One-year no call, no worst-of exposure. That to me is not a bad deal,” he said.

“People want income these days. Rates may be rising, but we’re still at very low levels.”

The three-year Treasury yields 2.44% and the five-year, 2.49%.

“I don’t think we’re going to have Treasury yields exceeding 8.25% any time soon,” he said.

“Income is going to continue to be hard to come by, so that’s what makes it attractive.”

Safer downside

The downside risk was limited, he added.

“My best guess is you’re going to get called in those three years. If that’s the case, it’s not the worst thing to happen,” he said.

“Over a four-year period, the 20% buffer is safe. It’s a geared buffer but still a buffer. If it wasn’t geared, you may get only 10%.

“This is a way to get exposure to the S&P with some reasonable income and legitimate protection.”

The tenor was also a plus for conservative investors.

“I don’t think the S&P is going to be down 20% in four years, but you always want to play it safe,” he said.

For this adviser, all structured notes should compensate investors for giving up some of the benefits of long equity positions.

“There are many notes I don’t like because they don’t offer enough safety to compensate you for the illiquidity,” he said.

“Here you’re getting the safety.”

Cramer said he focuses on preventing losses when picking notes for his clients.

“The reason people should be doing structured notes is for the protection, not the upside. If you want the upside, you go to the stock market,” he said.

“It would be wonderful to have uncapped upside, high leverage, good protection, high income, but it’s not going to happen.

“I could use this note as a bond proxy. Bonds have suffered with rising interest rates. This note will probably behave better.”

Still too much risk

Steve Doucette, financial adviser at Proctor Financial, expressed reservations about the risk-adjusted return of the product.

“I like autocalls for the income. But here comes the risk part on the downside. There’s so much going on in the market. We’re off the highs but valuations are still stretched. It’s not something I could use as bond replacement because of the unlimited downside,” he said.

Geared buffer can indeed bring the principal down to zero due to the multiple, which is calculated to achieve such outcome in the worst-case scenario.

Allocating the note to the equity portion of the portfolio would require modest return expectations.

“Do you want to use the note as equity replacement? If you believe your equity return is going to be less than 8%, then it’s a great equity replacement.”

But either way the notes did not offer a satisfying risk-reward, he said.

“If it had a 12% coupon, I would be willing to do it.”

The automatic call if it occurs would remove all market risk from the equation, he said.

“But you can’t count on the autocall because you don’t know if you’ll get called. If there is a bear market, you could get locked in for four years,” he said.

Risk mitigation factors

The buysider, who bought the notes, had a different view.

“While there is potential for losses, it’s only if you never get called that you’ll lose money,” he said, adding that there are seven call opportunities during the term.

“To be down each and every year for four years in a row is not very likely. And even if you didn’t get called, which can happen, you would have to be down more than 20% over a four-year period.”

In addition., any loss in principal would be partly cushioned by the income.

“If you do lose money, it’s not a total loss. You are going to get some coupons along the way. We just don’t know how many, but you will get some,” he said.

For this buysider, the notes fit into the definition of fixed-income replacement.

“The Fed is going to raise rates. Any traditional fixed-income instrument will get hit by rising rates. Depending on your duration, you’re going to lose more principal than you’re picking up in additional interest.

“It’s a good alternative to fixed-income.”

Credit Suisse Securities (USA) LLC is the agent.

The notes will settle on April 5.

The Cusip number is 22553PPK9.

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