Credit Suisse’s $1.62 million contingent coupon autocallables tied to ETFs have rare barrier

By Emma Trincal

New York, Aug. 26 – Credit Suisse AG, London Branch’s $1.62 million of high/low coupon autocallable yield notes due Feb. 27, 2017 linked to the Energy Select Sector SPDR fund and the Technology Select Sector SPDR fund offer unusual conditions for the payment of the contingent coupon, sources noted.

“It’s different, but it’s there for a reason,” a market participant said.

Each quarter, the notes will pay a coupon at the rate of 9% per year unless either fund closes below its barrier level, 65% of its initial level, on any day during that quarter, in which case the coupon will be 1% for that quarter, according to a 424B2 filing with the Securities and Exchange Commission.

The atypical aspect of the contingency, he said, is related to the way the barrier is observed – on any day during the quarter. Such barriers are called “American” as opposed to “European” barriers, which strike on a specific date.

The autocallable feature, however, is standard for a worst-of, he noted.

The notes will be called at par if both funds close at or above their initial levels on any quarterly observation date, according to the prospectus.

In the absence of a call, the payout at maturity is also based on an American barrier with the observation period stretching to the entire duration the notes. The payout will be par if both funds close at or above their respective barrier levels on each day during the life of the notes, the prospectus said. If not, investors will be fully exposed to the negative return of the lesser-performing fund.

American coupon barrier

“The American barrier used for the payout is there to help generate a higher coupon and to enhance the return,” a market participant said.

“If breaching the barrier can happen any day during the quarter, it will be more difficult to get paid. More risk means more reward. Investors get better terms.”

The issuer is able to boost the coupon level as well as to offer a minimum 1% coupon if the barrier is breached, according to the terms of the deal.

This market participant said that using American barriers for a contingent coupon is not common.

“But it makes sense. It’s there to boost the yield,” he said.

As with all other worst-of autocallables, the call is automatically triggered if both underliers are above their initial price on the observation date.

“The whole idea is to make it harder for the investor to get the coupon.

“The worst-of will do that.

“And making the barrier observable on a continuous time basis will do that too.”

The fee was 25 basis points, according to the prospectus.

“It’s a pretty low fee. That’s a bit surprising. Usually these levels tend to be institutional levels, and this one doesn’t look like an institutional deal. Any time you see those – a worst of, an autocall – they’re typically more retail deals,” he said.

Unfortunate timing

Paul Weisbruch, vice president of options sales and trading at Street One Financial, considered the consequences of the date of pricing, which was Thursday, a day prior to Friday’s correction.

“It was priced before the move. This is a challenge right there,” he said.

“Volatility has moved in unprecedented levels in such a short period of time.

“Three weeks ago, the VIX was at 12. On Monday, it jumped to 53.

“It was tough before to get a 1% sell-off, let alone 3%. All of a sudden, you get a 10% correction from the highs.

“Volatility was likely underpriced on the trade date just the day before this new shift in the market.

“If they had priced it only the next day or Monday, the coupon would have been much more appealing. The deal would have been structured much differently.”

The initial level of the two underlying Select Sector SPDR funds was $65.80 for the Energy Select and $26.73 for the Technology Select. Sixty five percent of those levels determine their respective barrier levels of $42.77 and $26.73. Both funds so far recorded their worst closing prices on Monday since the deal began to trade. The Energy Select was down 7.25% from its initial level of Thursday and the Technology fund fell 6.20%.

These price drops amid an extraordinary spike in volatility show that the 35% protection amount is substantial, a source said. But those “worst” closing levels were already hit two days after the initial date of trading and one day following Friday’s correction.

“It’s a complex deal. And it was priced just before the explosion in volatility. It’s bad luck because we’re not even in October yet and October is supposed to be the bad month,” Weisbruch said.

“It’s not like the issuer made that call and purposely decided to price it just before. In the middle of last week nobody had any idea of what was coming. Friday caught everybody off guard,” he said.

Credit Suisse Securities (USA) LLC was the agent.

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.