Deutsche Bank’s $52.61 million step-up autocallables linked to Euro Stoxx 50 meant for income

By Emma Trincal

New York, May 20 – Deutsche Bank AG, London Branch’s $52.61 million of 0% autocallable market-linked step-up notes due May 25, 2018 tied to the Euro Stoxx 50 index offer participation in the index at maturity but should be considered more as an income product than a growth product, sources said.

The notes will be called at par of $10 plus a call premium of 12.65% per year if the index closes at or above the initial level on any annual call observation date, according to a 424B2 filing with the Securities and Exchange Commission.

If the index finishes at or above the initial level, the payout at maturity will be par of $10 plus the greater of the gain and the step-up payment of 35%.

Investors will be fully exposed to any losses.

Income strategy

“It’s an interesting product. It’s certainly been done before. But the market-linked feature is really not the main concept. The main idea behind the structure is that it’s likely that the call will be activated so that you have a very specific income objective of 12.65% per annum,” a market participant said.

The payout at maturity was neither the best nor the most likely scenario, he said.

“If you’re not called after one year or after two years, chances are you’ll end up being exposed to a down market. Most investors in these notes want to get called,” he said.

Early redemption

He looked at the two positive scenarios if the notes were to mature: the index gains up to the step level and investors receive the step payment or the index finishes above the 135% threshold and investors get one-to-one exposure to the index.

“The step payment is nice. Whenever someone offers you the opportunity to beat the market, it’s always a good thing,” he said.

“Basically anywhere from zero to 35% you can outperform the benchmark. Telling people that they can outperform within a certain range is attractive. People are always going to look at that.

“Now, if the market goes up above the step level, you get the index return. It’s nice too, but it’s less likely to happen.

“To be honest, if by the end of year two you have not yet been called, it means the market is down. It’s highly unlikely that the market would jump up 35% in the last year.

“It’s a nice opportunity to have, but you’re not going to enjoy the benefit of the potential unlimited upside.

“That said, if you look at it from an income standpoint, it’s a decent product offering a decent return.”

The offering was the second in size to price last week after a 30-year Euro Constant Maturity Swap rate deal brought to market by Barclays Bank plc for more than $142 million.

European view

“It’s a good deal. It seems compelling,” an industry source said about the Deutsche Bank offering.

“The at-the-money knock-in is really risky, but the idea is to get called.”

He was referring to the lack of any downside protection mechanism.

“If you like the European market, if you believe in the benefits of QE in Europe, why buy the Euro Stoxx 50 directly when you can get 12.65% after one year? It seems like a pretty good return.”

The notes, as it is almost always the case with structured products, do not entitle investors to receive dividends. The dividend yield for the Euro Stoxx 50 index is 3.40%.

“Sure, you don’t get the dividend, but you get 12.65%,” he said.

“We did a Euro Stoxx deal recently with a 60% barrier, but the coupon was lower.”

This source agreed that the main appeal of the notes is the autocallable feature for its attractive call premium.

“People didn’t buy this deal for the step up. It’s sold to be called. Then you can reinvest,” he said.

“At the same time, having the step up can be helpful. Not having a cap is good too. You never know. It may be helpful if the market trades sideways.”

The notes (Cusip: 25190H158) priced on May 14.

BofA Merrill Lynch was the underwriter.

The fee was 2%.

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