Credit Suisse’s autocallables on stocks pay eye-popping 20.75% contingent yield

By Emma Trincal

New York, Nov. 8 – Credit Suisse AG, London Branch’s contingent coupon autocallable yield notes due Nov. 18, 2019 linked to the lowest performing of the common stocks of Morgan Stanley, SVB Financial Group and Wynn Resorts, Ltd. are likely to catch investor’s attention if not their interest given the two-digit coupon, sources said.

The notes will pay a quarterly contingent coupon at an annual rate of 20.75% if each stock closes at or above its knock-in level, 70% of its initial level, on the observation date for that quarter, according to a 424B2 filing with the Securities and Exchange Commission.

Wynn Resorts is a developer, owner and operator of casino resorts.

SVB Financial Group is a financial services company and a bank holding company.

The notes will be automatically called at par if each stock closes at or above its initial level on May 10, 2018, Aug. 10, 2018, Nov. 12, 2018, Feb. 12, 2019, May 10, 2019 and Aug. 12, 2019.

The payout at maturity will be par unless any stock finishes below its knock-in level, in which case investors will receive par plus the return of the worst performing stock.

Flying high

“Oh my Goodness! That’s a great yield. The question is the risk,” said Tom Balcom, founder of 1650 Wealth Management.

Investors seeking income always look at the “risk-free” rate as a benchmark. Right now the two-year treasury yields 1.66%.

“Anything above that is risk. You have to explain the risk to the client.”

Balcom identified some of the uncertainties associated with the product: contingency of the coupon, principal at risk if the barrier is breached, correlation risk as well as company risk since the three underliers are single-stocks and not indexes.

“You have three individual sectors and you don’t know what can happen with these three names over two years.

“There’s potential for huge reward. But the risk is huge too.”

Casino operator

The high-yield was also the result of the types of choices used in the worst-of, all volatile but some more than others, a market participant said.

“It’s Wynn. It’s a casino, entertainment stock. In my eyes, that’s a big factor.

“It reminds me of those reverse convertibles we used to see on Las Vegas Sands. Only this time it’s not a single name but a worst-of.

“It’s a good talking point at the bar, on the golf course...and it’s a yield-generator in a structured note,” he said.

Investors in the notes are exposed to three different stocks but only two sectors, he noted – financials and services.

But this made little difference.

“It remains three stocks and the total is still uncorrelated. There’s still plenty of risk,” he said.

The deal is set to price on Friday.

“I would be surprised if this note had a big notional. It’s a good tactical play but it’s not for everyone.

“The large deals continue to be structured around equity indices.

“This one has obvious risks.

“While the 30% barrier is OK for Morgan Stanley, I’m not too sure about the other two,” he said.

Contingency

When volatility was much higher in the aftermath of the financial crisis, firms were able to generate even much higher yields on the basis of one name only, an industry source said.

“Those were reverse convertibles with a fixed coupon. At least you could use the coupon as a buffer if the stock fell too much,” he said.

With this product, shorting volatility was only one way to extract the premium. Correlation risk played an essential part as well, he said.

“You would think Silicon Valley Bank and Morgan Stanley – two financial stocks – would be correlated. But in reality you can’t really compare a regional bank with a big broker-dealer wirehouse,” he said.

The notes should be sold with caution, this source said, as the double-digit yield is likely to attract attention.

“I don’t know what the pitch is going to be. But you probably have to find investors who are comfortable with the 30% barrier, the structure and the stocks. And they don’t mind putting those three names together to generate a large coupon.”

Credit Suisse Securities (USA) LLC is the agent.

The notes will settle on Nov. 16.

The Cusip number is 22550BP80.

© 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.