Credit Suisse’s contingent coupon autocalls on three hot stocks show unusually long tenor

By Emma Trincal

New York, June 9 – Credit Suisse AG, London Branch’s 0% contingent coupon autocallable yield notes due June 14, 2028 linked to the least performing of the shares of Airbnb, Inc., Snowflake Inc. and Splunk Inc. provide an eye-catching coupon over an unusually long tenor, sources said.

The notes will pay a monthly contingent coupon at an annual rate of 20.3% if each stock closes at or above its coupon barrier, 60% of its initial level, on the observation date for that month, 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 after six months.

The payout at maturity will be par unless any stock finishes below its 50% knock-in level, in which case investors will be fully exposed to any losses of the least-performing stock.

IPO stocks

Two of the underlying companies – Airbnb and Snowflake – went public late last year.

“A lot of the implied forward volatility is what gets you to that coupon. You have three volatile stocks and if you combine the three of them, you can capture that type of return,” said a sellsider.

Airbnb went public in December. Its price share more than doubled on its first day of trading on the Nasdaq from its $146 opening price. Less than a week later, the stock dropped 17%. On Feb. 11, the share price peaked at $219.94, up 81% in less than two months. It closed at $144.85 on Wednesday, down 34% from its February high.

Snowflake, a cloud data platform, is the most volatile of the three. Both Airbnb and Snowflake have implied volatilities greater than 50% compared to 17% for the S&P 500 index.

Snowflake began trading on the New York Stock Exchange in September. Last month, it dropped 57% from its December high.

Splunk, another data provider, went public in April 2012.

From its September 52-week high to its low in May, the stock dropped 52%.

Unusually long

“The seven-year term is interesting,” the sellsider noted.

“Normally with recent IPOs the issuer may not want to go that far because the options are not as mature and as liquid as they would be with an established company. The concern here is that it’s harder for the issuer to hedge. In general, the liquidity of the options starts to dry out after three years.”

But for investors, the long tenor may provide an additional level of comfort, he added.

“As long as they believe that prices will move up over time or at least won’t be cut more than in half, going seven years out gives plenty of time for the stock to go up,” he said.

More premium

The long-dated note allowed the issuer to boost the coupon, a market participant said.

“Those autocalls are a combination of different things. You have a worst-of, a knock-out and the contingency of the coupon. But overall, you’re basically selling put options. The longer your term, the more premium you get from selling those puts.

“For a 20% coupon, they probably needed to go longer even if they use the worst of three volatile stocks,” he said.

Market darlings

This market participant agreed that the seven-year note had an unusually long tenor for an autocall.

But he downplayed the difficulty for issuers to hedge the product.

“In general, compared to a well-established company, recent IPO stocks have less liquidity and therefore they’re harder to hedge. But not these things.

“Airbnb, Snowflake are new companies. But they’re popular names trading on momentum. It doesn’t take that much time for a stock to be liquid if it gets the market’s attention,” he said.

No call risk

For this market participant, the long maturity was not necessarily an advantage.

“I think having a seven-year holding period on an autocall is riskier than two or three years because you have no upside. What if the notes never get called? You’re stuck,” he said.

“Personally, if I do an autocall, I’d rather do it for the short term. Most people buy those products to get out early.”

What stands out in this note is the yield, an industry source said.

“This giant coupon is very, very attractive,” he said.

“With a 20% plus, you can afford to miss a few payments. Each month gives you 1.7%. The longer the note is held, the greater your return.

New underlying

“Some of those companies, like Airbnb, are disruptors. They have strong growth potential. Over the long-term horizon, the stock price of these companies should be higher or they’re not going to be existing companies in seven years.”

The use of some of those names in notes was relatively new, he said.

“Both Airbnb and Snowflake had recent IPOs. I’m sure firms are just starting to issue those names.”

Agents have priced $61 million in 10 deals linked to Airbnb since the company’s IPO in December, according to data compiled by Prospect News.

Snowflake was used in 17 deals since September for a total of $10 million.

Splunk, which has a longer history, was the underlying in 39 deals totaling $67 million.

These figures illustrate the use of each name as sole underlier.

Credit Suisse Securities (USA) LLC is the agent.

The notes priced on Wednesday and will settle on Monday.

The Cusip number is 22552XMV2.

© 2015 Prospect News.
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