Credit Suisse’s $124.08 million step-ups linked to Euro Stoxx 50 drew top bid for high premium

By Emma Trincal

New York, March 4 – Credit Suisse AG, London Branch’s $124.08 million of 0% autocallable market-linked step-up notes due Feb. 23, 2018 linked to the Euro Stoxx 50 index topped the list of deals that priced last week, according to data compiled by Prospect News. Sources said the 11% call premium acted like a magnet for investors looking for a higher yield or double-digit return.

The notes are automatically called at par of $10 plus an annualized call premium of 11.21% if the index closes at or above the initial level on either of two annual observation dates, according to a 424B2 filing with the Securities and Exchange Commission.

If the notes are not called and the index finishes above the step-up value – 135% of the initial level – the payout at maturity will be par plus the index gain.

If the index finishes at or below the step-up level but at or above the initial level, the payout will be par plus the step-up payment of 35%.

Investors will be fully exposed to any index decline.

Not the worst risk

Marc Gerstein, research consultant at Portfolio123, said income was the principal motivation for investors.

“A lot of people are going to get paid after year one. The 11% annualized sounds fine. Eleven percent, 22%, 35%, these are fine rates so long as you get them,” he said.

He objected to the argument that investors in the notes are worse off than equity investors because they don’t receive the index dividends.

“You’re not getting the dividends, but you’re getting the returns,” he said.

“Anybody who thinks equity, there’s no point. If you’re bullish, you don’t want the cap. Equity people can find better things to do. Buy the ETF and be done with it!”

Gerstein said the risk-reward profile of the note was reasonable.

“There are not a lot of scenarios where you can lose money. To lose money, you would have to be under water for three consecutive anniversaries. I’ve seen worse in terms of risk,” he said.

“To me, 11% a year is really very enticing, so I kind of like that.”

Income

Investors in the notes would not fit the pure equity or derivatives profile.

“It’s a derivatives product, but the equity investor who uses derivatives is not doing it for the protection. There is no protection. The investor is not going to be an equity investor either. It’s more of a fixed-income kind of product even though you have equity risk,” he said.

“But anytime you want 11% from a fixed-income product you’re going to take monstrous risks. Credit events can happen, bankruptcies or restructurings happen all the time when you invest in junk bonds or distressed. And if you look for that kind of yield in dividend stocks, you’re not going to get it. They’ll give you 7%, 9% top, and dividends get cut frequently.

“My point is for that kind of yield, are you really taking much more risk that you would with high-yielding bonds or dividend stocks? This note gives you 11%. The risk is to be down on the first, second or third anniversary. It’s not the worst risk out there.

“This is for people who want to reach for yield and who understand the risk-reward of that corner of the income market. Compared to junk bonds or high-yielding equities, it looks pretty competitive to me. I sort of like it.”

Double-digit return

A market participant, however, said he did not consider the notes to be an income product.

“These deals are popular, obviously. You get something on the call date even if the market is flat, and same thing at maturity. But the risk is to sit there for three years getting nothing,” the market participant said.

“These are not good structures for investors who actually need income. I’m not saying it’s a bad deal. But there is a reason why a whole segment of the market will not look at these notes. They tend to prefer contingent coupons because you have a chance to get the income and collect the coupon over a certain period of time.”

Autocallable contingent coupon notes, he conceded, are unlikely to offer the same type of reward.

“Still ... Many investors would rather see structures with less than an 11% premium but with a decent chance to collect a coupon,” he said.

Compared to straight autocallables, which offer no participation at maturity, some sources said that the appeal of the market-linked autocallable structure was the possibility to avoid a cap at the end if the notes are not called.

“The one-to-one upside at maturity may be a good marketing point. But the reality is that you are getting capped because the probabilities of not getting called twice and to finish above the step level are slim,” he said.

“Look, this is not a bad structure. But the 11% is not a yield. I wouldn’t call it that way. This is for people looking at a product that can deliver a double-digit return. It’s not income.”

The notes (Cusip: 22548D823) priced on Feb. 26.

BofA Merrill Lynch is the agent.

The fee is 2%.

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