Credit Suisse’s 21% autocallable reverse convertibles on three stocks likely a short-term play

By Emma Trincal

New York, March 18 – Credit Suisse AG, London Branch’s 21% autocallable reverse convertible securities due March 23, 2020 linked to the least performing of the common stocks of eHealth, Inc., Hertz Global Holdings, Inc. and Papa John’s International, Inc. caught advisers’ attention for the eye-popping guaranteed interest rate. But the length of the notes is likely to be short, a fact that may influence the buying decision in some cases.

Interest is payable monthly, according to a 424B2 filing with the Securities and Exchange Commission.

The notes will be called at par if each stock closes at or above its initial level on any monthly trigger observation date, starting June 19.

The payout at maturity will be par unless any stock finishes below its 55% knock-in level, in which case investors will receive a number of shares of the worst performing stock equal to $1,000 divided by the initial share price or, at the issuer’s option, the cash equivalent.

Good picks

Jerry Verseput, president of Veripax Financial Management, said he had no problem with a call occurring on the first call date. The coupon was too high to pass and the structure offered some attractive terms, which mitigated some of the risk.

“All those stocks except eHealth, which has been up a lot, are trading in the middle of their range. From an income standpoint, it’s pretty decent,” he said.

“It’s speculative. But those stocks are not bad stocks and a 45% margin of safety over one year is a pretty significant margin.

“If you did break that boundary and one of the stocks dropped 50%, you’d have lost only 29% because the coupon is not contingent. You do have a 21% buffer.”

Income instrument

For investors who already own stocks, the notes offer an attractive way to generate income, he noted.

By definition, income-oriented products, unlike participation notes, do not benefit from growth. The underlying asset simply needs to be above a certain strike and not fall below a predefined barrier level.

“Those stocks may not be poised for explosive growth, and frankly, we’re not going to get explosive growth in the market anyway,” he said.

“If you own individual stocks but need income, you’d have to sell. With this, you don’t need to sell anything.

It’s going to give you 21%.”

Another way for stockholders to generate income is through dividends. But the notes beat that option, he added.

“Collecting the dividends is not going to give you 21%. This is a good way to monetize a stock portfolio to generate some income,” he said.

Called? So what

The only “risk,” is to be called on the first observation date, which is after three months. But for Verseput, this scenario would not be negative. Getting 5.25% in three months does not change the annualized rate of return.

“It’s still 21% a year. I never understood why people complain about getting called early. It’s probably because they’re paying transactional fees. As a fee-based adviser I approach this from a different perspective. If I bought autocalls [several] times in a row, I won’t pay anymore fee. We waive the fee.”

The underwriter will charge a fee up to 2.875%, according to the prospectus.

“You still get your 21% regardless of what the fees are,” he said.

If called on the first observation date, investors would have to reinvest the proceeds and may not get the same attractive coupon, which is called “reinvestment risk.”

“All right, so you have to reinvest the proceeds. It’s more work. But if it’s bought by an adviser that’s what the adviser is supposed to do,” he said.

To address market risk, investors in the notes would probably have to be familiar with individual stocks.

“Papa John’s could lose 50% even if the market is going up. People who don’t invest in stocks don’t understand that. Obviously, you need to be familiar with the risk,” he said.

“This is a good way to monetize the risk and the volatility associated with owning stocks.

“You have to look at the alternatives. Where else are you going to get 1.75% on your first month? If the market handed me a 1.75% monthly rate of return, I would take it.”

Insane coupon

Carl Kunhardt, wealth advisor at Quest Capital Management, was also impressed by the fixed coupon amount.

“I do like it,” he said.

“21% fixed rate is an insane return, particularly with that barrier because the likelihood of something falling by 45% is very limited.”

The main issue to consider was the so-called “call risk,” or the equivalent of reinvestment risk.

“The fact is, you’re not going to make it past the first quarter. You’re really not,” he said.

“I would do it for the coupon. But such a short-term paper may not be worth the time you have to put into it.

“Buying a structured note is not an easy process. There is a lot of paperwork, a lot of disclosures you have to give.”

The 1.75% interest payment remained very attractive.

“You’re not even going to make that in a year in a savings account,” he said.

“But when I see all the paperwork involved, all the time-consuming red tape, it’s not worth the trouble.”

Credit Suisse Securities (USA) LLC is the underwriter.

The notes will price on Tuesday.

The Cusip number is 22549JH37.

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