Credit Suisse’s autocallable reverse convertibles get yield boost with fourth underlying stock

By Emma Trincal

New York, Jan. 17 – Credit Suisse AG, London Branch’s 9% autocallable reverse convertible securities due Jan. 22, 2020 linked to the lowest performing of four media stocks illustrate how the inclusion of a fourth asset in a worst-of structure may increase the coupon, guarantee its payment and improve protection, according to sources.

“But it comes with more risk, as it should,” a market participant said.

Reverse convertible

The four underliers are the common stocks of Walt Disney Co., CBS Corp., Twenty-First Century Fox, Inc. and Viacom Inc., according to a 424B2 filing with the Securities and Exchange Commission.

Interest is payable monthly.

Beginning April 18, 2018 and ending on Dec. 18, 2019, the notes will be automatically called at par if each stock closes at or above its initial share price on any monthly trigger observation date.

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

Fourth stock

Adding another underlying in a worst-of structure is an effective way to strengthen the coupon, said Jason Barsema, co-founder of Halo Investing.

“For people positive on media stocks, especially with the consolidations and mergers that are taking place, this is a way to increase your return over a similar deal based on the sector itself,” he said.

Consolidation

Worst-of deals typically are linked to the worst performance of two or three assets, not four. In this case, the fourth stock helped provide a fixed interest rate, he said.

“The basket is a correlated basket. All stocks are in the same sector. Disney buying some of the assets of Fox may make those stocks a little bit less correlated because of merger news. But a 55% barrier is a pretty deep protection.

The Department of Justice Antitrust Division is reviewing the proposed acquisition.

“Even if the stock goes down due to merger arbitrage, obviously it’s not going to drop 45%.

“If Disney is down 45% because they’re acquiring Fox, I’m buying Disney!” he said.

Yield enhancement

Barsema said this note reminded him of another worst-of deal based on four bank stocks, which offered a dramatically higher yield than a note linked to the Financial Select Sector SPDR exchange-traded fund.

“Fifty percent of the yield comes from just adding a fourth name,” he said.

“If you have a positive view on the bank sector or the media sector, you can have exposure to this basket of correlated stocks. The worst-of increases your risk, but by the same token for a similar exposure, you have a much higher yield and more protection.”

Pricing

The market participant agreed about the benefits of including a fourth underlying.

“Many people want to express a view on a sector with some protection. A worst-of can help you achieve that if you’re bullish on the overall sector,” he said.

“The advantage of taking stocks in the same sector is to reduce the risk, because there should be more correlation between those names.”

“But when you increase correlation in a note, pricing becomes more challenging, especially when volatility is so low.

“Introducing another stock may alleviate that and give you more premium.”

Sector bet, kind of

This strategy is not the same as getting sector exposure through an ETF, he noted. Investors in a worst-of deal need to keep in mind they are not investing in a basket but in the worst performing stock of the basket.

“But it’s still a sector play, and if you’re bullish it may make sense to use this structure for the yield and the barrier levels that it has to offer,” he said.

Credit Suisse Securities (USA) LLC is the agent.

The notes (Cusip: 22549JNU0) will settle on Monday.

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