Credit Suisse's $111.37 million step-ups linked to Euro Stoxx top deal so far; BofA is agent

By Emma Trincal

New York, Feb. 5 - Credit Suisse AG, London Branch's $111.37 million of 0% autocallable market-linked step-up notes due Jan. 27, 2017 linked to the Euro Stoxx 50 index are the largest deal of the year so far, according to data compiled by Prospect News.

BofA Merrill Lynch was the agent.

The notes will be automatically called if the index closes at or above the initial index level on either of two observation dates, according to a 424B2 filing with the Securities and Exchange Commission.

The call premium is 11% if the notes are called on Feb. 6, 2015 and 22% if they are called on Jan. 22, 2016.

If the notes are not called and the final index level is greater than the step-up value, 142.5% of the initial level, the payout at maturity will be par plus the index return.

If the final index level is greater than or equal to the initial level but less than or equal to the step-up value, the payout will be par plus 42.5%.

If the final index level is less than the initial index level, investors will have 1-to-1 exposure to the decline.

Sources said the success of the offering should mostly be attributed to its agent.

Size

"The structure is not really new, but the distribution is key," a structurer said.

"There's a reason why Bank of America is the No. 1 distributor each year. It has a lot to do with size. At firms like Merrill, the approval committee looks at those deals reasonably. There is risk, for sure. But their take is as long as you disclose it and follow the guidelines there is no reason not to approve a deal that's reasonably structured even if it's principal-at-risk. When the client wants it and the issuer wants to sell it, as long as the structure is reasonable, it's a done deal.

"Smaller broker-dealers don't do deals of this size because for them, it's much more problematic to get anything approved. In fact, anything that's principal-at-risk, even the simplest step-up like this one or even a buffered note, is going to be hard to get approved. They only want to approve principal-protected products.

"This deal is huge, but it's not an earth-shattering structure by any means. My point is that Bank of America is capable of distributing those types of deals because they have the capabilities to do so. They have advisers who are educated on the product and feel comfortable selling it. That's the difference."

Distribution channel

A sellsider agreed.

"The size is very much a function of the distribution channel. Smaller broker-dealers lack the educational effort put in place at the big firms," this sellsider said.

"Merrill has spent a lot of resources educating its salesforce. Advisers there tend to be comfortable with products. They know the desk that builds the notes. They know they can get support on the secondary market. They have the educational support.

"This whole system allows for more streamlined distribution. The greater firms make sure that advisers don't get confused when showing the product. These advisers are more knowledgeable."

Not retail

Looking at the terms of the structure, this sellsider said that the product must have been aimed at high-net-worth clients.

"It's pretty specific," he said.

"The autocallable nature of it, the principal-at-risk, the size, all this makes it a wealth management product, no doubt about it, something specifically designed for a certain type of people who buy this.

"You won't find this type of deal in retail. That's not the stuff that retail investors buy."

Part of the originality of the structure is the use of an autocallable feature in a market-linked step-up, sources noted.

While there is no cap at maturity, investors could see their upside limited to the call premium in the event of an autocall, according to the prospectus.

No cap versus buffer

Despite this possibility, the sellsider said that the notes are designed for investors who value unlimited upside more than downside protection.

"The structure is interesting. It's a step-up with no downside protection. There's a theme here. People don't want to be substantially underperforming the market. Structures like this one, products that don't limit your upside, are getting more traction than capped leveraged notes," he said.

The traditional leveraged buffered note, which most of the time carries a cap, is designed for investors who are willing to sacrifice the upside above the cap in order to get some partial downside protection, he explained.

"With a step-up like this one, the deal is more about how can I avoid underperforming the market? At maturity, if the market doesn't perform that well, they're guaranteeing you a step. And if it goes beyond the step, you're not going to be left behind. You are not going to underperform substantially because you'll be long the index minus the dividends. You'll be slightly underperforming, but not substantially," he said.

"The idea is we may be entering a period of heightened volatility. But in three years, who knows what's going to happen? If the market is up, I want to be long the index."

Euro bid

Investor appetite for the European equity benchmark, a notable trend last year, has continued this year, which also explained the popularity of the offering.

Agents so far this year have sold $610 million of notes linked to the Euro Stoxx 50 as sole underlier, which represents more than 15% of the volume as of Wednesday, according to data compiled by Prospect News. Forty seven offerings linked to this benchmark have priced out of 813 deals.

"The Euro Stoxx has a higher dividend rate, which makes the structures more cosmetically attractive. If you ignore the unpaid dividends, the terms are slightly better," the structure said.

The Euro Stoxx 50 dividend yield is 2.75% versus 1.82% for the S&P 500.

"There's also another factor, which is access. In the U.S., it's easy to have more specific views on U.S. equity. You can buy the index of course, but you can also buy specific sectors and specific stocks. Investors when they pick European equity are somehow taking a macro view. They have fewer alternatives in terms of stock-picking. It's not as easy to buy individual European stocks or to express a particular view on a sector or company in the euro zone. This is why this benchmark can be particularly handy," he said.

The notes (Cusip: 22545F888) priced Friday.

The fee was 2%.

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