Credit Suisse gives longer duration with its autocallables linked to Hang Seng Enterprises

By Emma Trincal

New York, July 11 - Credit Suisse AG, Nassau Branch is prepping a three-year autocallable note whose longer-than-average duration is seen as a tool to enhance returns in a difficult pricing environment, sources said.

The upcoming 0% autocallable securities due July 31, 2015 linked to the Hang Seng China Enterprises index offer yearly observation dates at which time a call may be triggered at an annualized call premium of 11% to 14%, according to a 424B2 filing with the Securities and Exchange Commission.

The call will be automatically triggered if the index closes at or above the trigger level on Aug. 1, 2013, July 28, 2014 or July 28, 2015. The trigger level is expected to be 100% of the initial index level.

If the notes are not called and the final index level is greater than or equal to the 70% knock-in level, investors will receive par at maturity. If the final index level is less than the knock-in level, investors will be fully exposed to the decline from the initial level.

Longer than usual

Sellside sources said that a three-year duration on an autocallable structure is more than the average in length but that it may be indicative of a new pricing trend.

"I think extending the autocall duration to three years has to do with pricing. With low interest rates and low volatility, you have to find the return somewhere. The rate side in particular doesn't help," a market participant said.

The longer maturity also enables less frequent review dates, he noted.

"We typically have monthly, quarterly or semiannually observation dates," he said.

"The more often you get a review, the greater the chances of being called."

About two-thirds of the autocallable notes that priced in the first half of the year had a one-year tenor, according to data compiled by Prospect News, which identified 228 offerings falling into that structure category. Three-year notes made for only 3% of the deals.

Overall, 74% of the autocallables that agents brought to market during that period had a tenor of one year or less.

New trend

Regardless of the duration, investors in autocallables should keep in mind that they may never get the benefit of an early redemption, an industry source said.

"If you have a three-year structure, your investment horizon should be three years. You cannot assume you will be called on the first call date. People have to be able to part with their money during the entire time," he said.

The longer tenor offers some benefits to investors, he noted.

"If you have a quarterly or monthly or semiannual rebalancing, it reduces your potential payout. It's less attractive than a yearly observation period," he said.

"In the U.S., they're starting to do longer-term autocallables. You'll see more and more of these. That's because it allows the issuer to introduce more attractive terms.

"The Hang Seng is volatile, so yes, they offer a 70% barrier. But volatility is relative. If this product represents your overall portfolio, it's risky. If it's only 5% of your portfolio, it's less risky."

Structuring constraints

Making an autocallable longer in duration helps issuers deal with two challenging market conditions that are weighing on pricing, a structurer said. He had in mind low interest rates and low volatility.

"I think this type of deal has to do with current pricing issues. With low rates, you have to go longer duration. You also look at the longer part of the volatility curve, which tends to be higher. Volatility is higher on longer periods of time. So going for a three-year term is a way to get better pricing," he said.

The structurer said that autocallable products reflect a short volatility position.

"You need volatility to be high to get a better coupon," he said. "If you go further down the curve, both from the rates perspective and from the volatility perspective, you'll get a higher premium. Ultimately, that's what investors are looking for."

The notes are expected to price July 26 and settle July 31.

The exact terms will be set at pricing.

Credit Suisse Securities (USA) LLC is the underwriter.

The Cusip number is 22546TWG2.

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