Credit Suisse’s autocall on S&P 500, oil & gas ETF offer fair chances of double-digit return

By Emma Trincal

New York, Dec. 17 – Credit Suisse AG, London Branch’s 0% autocallable securities due Dec. 29, 2023 linked to the lesser performing of the S&P 500 index and the SPDR S&P Oil & Gas Exploration & Production exchange-traded fund give investors several chances to earn a double-digit return thanks to a structure that offers cumulative call premium, one (out of two) deeply discounted underlying and a low knock-in level at maturity.

The notes will be automatically called at par plus a call premium if each underlier closes at or above its initial level on Dec. 22, 2020, Dec. 22, 2021 or Dec. 22, 2022, according to a 424B2 filing with the Securities and Exchange Commission.

The call premium is expected to be at least 13.75% per year and will be set at pricing.

If the notes are not called, the payout at maturity will be par plus 55% unless either underlier finishes below its knock-in level, 60% of its initial level, in which case investors will lose 1% for every 1% that the lesser-performing underlier declines from its initial level.

Cost, tenor

“This is a very interesting note. I may not have constructed a note that way or chosen this kind of ETF. But it gives you a pretty good opportunity to get a good return,” said Michael Kalscheur, financial adviser at Castle Wealth Advisors.

“A 13.75% annual return...that’s going to get my attention.”

Kalscheur said he had “no problem” with the issuer’s credit risk.

The cost of the deal was also very competitive.

“The fee jumped out at me. If it’s really 0.4%, that’s really low for a four year. That would be one of the best priced offerings I’ve seen ever if that’s the case.”

The four-year tenor was also a plus.

“We like longer terms although it could be called and just be a one year,” he said.

One of the two underlying assets however gave him pause.

Depressed fund

“The funny thing is you’re looking at two indexes that are at two completely different levels,” he said.

“You’ve got the S&P hitting all-time highs and then the XOP at its lowest.”

The SPDR S&P Oil & Gas Exploration & Production ETF is listed on the NYSE Arca under the ticker “XOP.”

The fund closed at $22.97 a share on Tuesday. It has dropped 71% since its all-time high of 2014 at $79.30.

“You’re talking about a worst-of. The combination makes me a little bit nervous. The XOP has been dropping to a point where it’s going to pop.

“Meanwhile the S&P has been running so much. I’m not expecting it to jump a lot more.

“If you’re mildly bullish on the S&P though, it’s a great opportunity to capture a double-digit return in what might not be a double-digit type of environment.”

Low entry point

Kalscheur said he was not concerned about missing out on the gains should the energy fund skyrocket.

“There’s no way in the world I’m going to buy XOP as a long-only investment in my portfolio,” he said.

“If I had the S&P and the Russell, it would be a different story. I may not want to miss the returns of the one that outperforms the other. But in this case, it doesn’t matter.”

The low valuation of the underlying ETF offered an additional margin of safety with the 60% barrier at maturity.

“This fund has already lost so much in the last five years. There is no way it’s going to lose 40% at the end of four years.”

Kalscheur concluded that the note was relatively “conservative.”

Low cost, competitive terms

The S&P 500 index itself was unlikely to drop more than 40% in four years despite its current valuation.

Looking at data he collected on the S&P 500 index going back 70 years ago, he found that over a four-year rolling period, the S&P 500 index had lost more than 40% only seven days.

“I like the terms. You can get your 13.75% premium if you get called. All you need is both indexes to be positive.

If it doesn’t happen, you still have a chance to get the premium at maturity. As long as none of them falls by more than 40% you get paid 55%.

“This is a very good way to get good returns if you have a conservative outlook on the S&P while eliminating a lot of the risk.”

Kalscheur always looks for competitive pricing as money not spent in fees can be used to improve the structure.

“The fee is crazy low. I think that’s why the terms are so good. Kudos to Credit Suisse for putting all of the money in the structure,” he said.

Kalscheur only had one objection: the underlying ETF.

“It’s a little bit too esoteric for us. I don’t have a lot of experience with that particular fund. I also don’t have the statistical data I have on the S&P to get a sense of the probabilities of winning.

“If I could get my arms around this index and be comfortable explaining it to a client, I would be comfortable putting this note in my portfolio.”

Low correlation

Steven Foldes, vice-chairman at Evensky & Katz / Foldes Financial Wealth Management, liked the notes but with reservations regarding the pair of underlying assets.

“The call premium is attractive. The credit is fine. The commission is reasonable,” he said.

“However, you have two underlying assets where the correlation is quite low.

“When we do worst-of, we try to put together two asset classes that are highly correlated to each other. That way you’re expressing a view.”

He cited as examples the S&P 500 and the Russell 2000 indexes, both used for a play on the U.S. stock market.

Another combination for instance would be international developed countries and emerging markets as both fit in the international equity of a portfolio.

“Here you have too poorly correlated assets, and that’s part of the problem,” he said.

However, many redeeming factors made the note compelling, according to this adviser.

Dual directional

“You get called if both are positive. Assuming you don’t get called, you get your premium at maturity unless one is below its knock-out. You could be down 39%, you’d still get your full coupon,” he said.

“That’s a long way to wait for your big win. But chances are you are going to get this return.

“It would be very unusual for the S&P to be down 40% over four years.

“And the fact that the energy ETF is significantly down makes it even more attractive.”

Having protection over a long time is usually “not a good use of your money,” he said.

In general, this adviser avoids four- or five-year notes with deep barriers as they tend to limit the upside potential. In this case however, investors do get paid on the downside.

“They don’t just give you your money back.”

“The fact that you can make money in four years makes is probably what makes it most attractive note,” he said.

Catching up

He also liked the snowball structure of the notes.

“The fact that your 13.75% premium is cumulative is also a good thing,” he said.

“I just wish the correlation between the two assets were not so low.

“But that’s how they’re able to extract this premium.

“They put together an attractive, creative note.”

Credit Suisse Securities (USA) LLC is the agent.

The notes will price on Dec. 20.

The Cusip number is 22551NC87.

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