Credit Suisse’s worst-of autocallables on S&P 500, oil ETF use call premium, downside digital

By Emma Trincal

New York, Aug. 24 – Credit Suisse AG, London Branch’s $3.19 million of 0% autocallable securities due Aug. 26, 2020 linked to the S&P 500 index and the SPDR S&P Oil & Gas Exploration & Production exchange-traded fund offer a rich structure combining an automatic redemption premium, a worst-of feature and a downside barrier that may trigger a fixed return, sources said.

The notes will be automatically called at par plus an annualized redemption premium of 17.5% if each underlying asset is at or above its initial level on any annual review date, according to a 424B2 filing with the Securities and Exchange Commission.

If each underlying asset finishes at or above its initial level, the payout at maturity will be par plus a contingent maximum return of 70%.

If either underlying asset finishes below its initial level but neither asset falls by 30% or more, the payout will be par plus 10%.

If either underlying asset finishes at or below the 70% knock-in level, investors will lose 1% for each 1% decline of the lesser-performing asset.

No appreciation

Digital structures are increasingly popular in the current range-bound market, a market participant said.

“These are great deals. I really like these digitals with some kind of downside protection,” he said.

Investors receive a 17.5% annualized premium if the notes get automatically called, which is a form of digital payout, he explained. Unlike contingent coupon notes, investors get paid only upon an early redemption scenario or at maturity.

Paid to wait

In this particular note, investors also receive a digital payment if the worst underlier does not fall by more than the barrier amount, he said, noting that such feature makes the structure slightly unusual compared to similar products.

“It’s like selling optionality, but at least you get compensated as opposed to getting just par,” he said.

“If the index underperforms but remains above the barrier, you get 10%. That compensates you for tying up your money for a long period of time.”

Digital versus dual

The deal is a typical autocallable play with a call premium, an industry source said.

“It’s 17.5% four times. If you don’t get called, you can get the maximum of 70% at maturity,” he said.

The use of a 10% digital payout above the downside barrier instead of par is less common.

“It’s a little bit different, but I’ve seen it before,” this source said.

“It’s some kind of digital on the downside. Your payment is fixed. There’s no participation like an absolute return.”

Absolute return notes, also called dual directional, offer a one-to-one positive exposure to the downside above the barrier.

“It doesn’t matter how much the index falls as long as it doesn’t breach. Your payment is fixed,” he said, commenting on the Credit Suisse notes.

“Say you have the same barrier on an absolute return deal and the index drops 30%. You would get 30% with the absolute return and only 10% with this one.

“It’s cheaper to design the downside that way, which is how they’re giving you a higher yield on the upside.”

Correlation

In terms of risk associated with the worst-of feature, the correlation between the S&P 500 and the ETF, which tracks oil stocks, has to be taken into account, the market participant said.

“In the past five years if you look at those two on a chart, there has been a strong divergence, but in the last year, we’ve seen some degree of correlation,” he said.

When two underlying assets show a positive correlation, investors incur a lower level of risk. Inversely, the risk increases when correlation is low or negative, which can also boost the coupon.

“The issuer is probably betting on a [correlation] break out. Over the long term, more factors are going to play into correlation and possibly drop it.”

The notes (Cusip: 22548QDP7) priced on Aug. 19.

Credit Suisse Securities (USA) LLC was the agent.

The fee was 2.6%.

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