Deutsche Bank's autocallables tied to Euro Stoxx offer potential high return with early exit

By Emma Trincal

New York, Aug. 23 - Deutsche Bank AG, London Branch's 0% autocallable securities due Sept. 1, 2016 linked to the Euro Stoxx 50 index offer an 11% annualized call return if the underlying index meets some conditions. The structure and the underlying contribute to lower the risk compared to similar products, said Eve Berlinska, structured products analyst at Future Value Consultants.

The notes will be called at par plus an annualized call return of 10.5% to 11.2% if the index closes at or above the initial level on Sept. 2, 2014, Aug. 27, 2015 or Aug. 26, 2016, according to an FWP filing with the Securities and Exchange Commission.

If the notes are not called and the index finishes at or above the 80% knock-in level, the payout at maturity will be par. Otherwise, investors will share fully in losses.

The exact call return will be set at pricing.

When dealing with a range, Future Value Consultants picks a value situated 75% above the lower end of the margin and 25% below its higher end.

In this case, the assumed call premium would be 11.025% per annum, she explained.

Typical autocall

"This is a typical autocallable with an annual kick-out date. It's less typical than the quarterly call dates, which we see most often," Berlinska said.

Future Value Consultants calls those products "review" in its nomenclature or regular autocallables.

Those notes pay a fixed return when the underlying is above an autocall threshold on a given call date. In such cases, the notes are redeemed early and investors get paid a call premium.

"Investors have to be prepared to lock in their capital for at least a year since the review is done annually," she said.

"Unlike the autocallables with a quarterly call date, this one gives you a chance to earn the full annual premium.

"This product is aimed at somebody who would like to achieve a predetermined return in the case the index hits the target. The problem is the uncertainty around the maturity and the reinvestment opportunity."

Future Value Consultants measures the risk associated with a product with its riskmap on a scale of zero to 10, with 10 the highest level of risk possible.

This metric is the sum of two risk components: market risk and credit risk.

At 3.95, the riskmap of this product is lower than the 4.15 average for the same product type, according to Future Value Consultants' research report.

Credit, market risks

"This result is not due to the credit risk, which is higher than average, but to the market risk," she said.

The notes have a 0.56 credit risk versus 0.33 for the average review product.

Meanwhile, the market riskmap is 3.39, compared with an average of 3.82 for the category.

"Here the product has a credit risk that's above average compared to products of its own group," she said.

"The CDS spreads are average when compared with other issuers, so the issue is not creditworthiness. Instead, I would attribute the gap to duration. You have annual, not quarterly call dates. That means the investor has to be locked in the product for at least a year. It's a duration that's longer than the average three-month. That's probably why the credit risk is greater.

"On the other hand, we have a market riskmap that's a little bit lower than average. This is due to other factors. We have a final-day barrier and a more stable underlying. The combination of those two things helps reduce market risk significantly."

In the event that the notes are not called, the value of the repayment is based on the final level of the index, according to the prospectus. It does not depend on the occurrence of a knock-out during the term, she said.

"Having a final-day barrier as opposed to a barrier observable anytime makes a big difference. It really reduces market risk," she said.

Still, the barrier was "a bit high," she said, stating that 60% to 75% is more common. But two factors offset the less protective barrier level, she said.

"One, the barrier is final. Two, we have a good, stable underlying with a three-year implied volatility of 21%. Most autocallables are linked to stocks in our database, which obviously would make for much more volatile underliers," she said.

High return score

Future Value Consultants measures the risk-adjusted return with its return score. The rating is calculated using five key market assumptions: neutral assumption, bull and bear markets and high- and low-volatility environments. A risk-adjusted average return for each assumption set is then calculated. The return score is based on the best of the five scenarios.

The notes have a 7.22 return score versus 6.41 for the average of the same product type.

"It's much better. This is a risk-adjusted return. We see that the score is better than average, which simply means that you are getting well compensated for the amount of risk taken," she said.

The best market assumption among the five scenarios is low volatility. The return score and the probabilities of return outcomes are based on this assumption, she said.

"You want a flat, low-volatility market. You don't really want the index to go much higher than the 11% return because you don't participate in the growth, so you would underperform. And you don't want the index to fall by more than 20%; otherwise, you would lose some of your principal," she said.

With the low-volatility assumption, investors have a 62.8% probability of earning an annualized return comprised between 5% and 11% per annum. The chance of getting a payment in the 5% to 10% bucket is 15.6%. On the downside, investors have a 21.6% chance of losing some or all of their principal.

Price, overall

For each product, Future Value Consultants computes a price score that measures the value to the investor on a scale of zero to 10. This rating estimates the fees taken per annum. The higher the score, the lower the fees and the greater the value offered to the investor.

The notes have a 7.48 price score. The average for the same product type is 7.12.

"This is a very strong price score for a competitive structure," she said.

"The issuer spent more on the options, offering fair value to the investors for this product. It's a regular autocallable, pretty easy to structure compared to the issuer who has to spend more on options with more complex products."

Future Value Consultants offers its opinion on the quality of a deal with its overall score. The score, which is 7.35 for the product, is simply the average of the price score and the return score.

The average overall score for the same product type is 6.76 in comparison.

"It's a good option for those who are looking for exposure to the European market without having to invest in it directly. It's a stable underlying with a good protection," she said.

Deutsche Bank Securities Inc. is the agent.

The notes will price on Tuesday and settle on Friday.

The Cusip number is 25152REA7.

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