Credit Suisse’s 15.6% autocallables tied to stocks show risky, worst-of bet on hype, momentum

By Emma Trincal

New York, May 9 – Credit Suisse AG, London Branch’s 15.6% autocallable yield notes due May 14, 2018 linked to the common stocks of Advanced Micro Devices, Inc., Tesla, Inc. and Twitter, Inc. offer a fixed, equity-like return but risks associated with the three underlying stocks are too many, sources said.

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

Beginning Aug. 9, the notes will be automatically redeemed 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 level, 55% of its initial share price, in which case investors will receive a number of shares of the lowest-performing stock equal to $1,000 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.

Momentum

“Oh my goodness,” said Tom Balcom, founder of 1650 Wealth Management, when he heard the names of the three stocks.

“It’s great to have a guaranteed 15.6% return but the ups and downs of those stocks can be brutal,” said Balcom.

AMD is a global semiconductor company.

Tesla develops and manufactures electric cars.

Twitter is the well-known microblogging company.

All three names are considered momentum stocks showing wide price swings on their respective charts.

For instance Twitter since it reported its first-quarter earnings ahead of expectations on April 26 has surged 25%. The price moved up and down this year. But from October to the recently released earnings the stock had been trending down 45%. The share price is up 13% for the year.

AMD’s recent earnings on May 1 was a miss, driving the price down 27% within the following week. The stock lost 10% this year.

Finally momentum stock Tesla, with an implied volatility of 32%, can also display significant moves. In 2013 for instance, the stock was up 340%.

The company last Wednesday reported a loss for its first quarter, pushing down its share price 7% the next day. Meanwhile, the high-flyer stock is up 50% for the year.

Volatility

“It’s fixed income but it’s not for fixed-income investors. I would never even try to put a fixed-income client in this,” said Balcom.

“This is for someone who wants to juice up the return of his or her equity portfolio.”

The three-month non-callable period was a plus.

“It’s appealing because you’re likely to get at least that much return. That’s almost 4% in three months. Then you may be called, but some investors may like it like this because it removes the risk. You hope to get paid and get called soon.”

But the stocks were much too volatile to make him be willing to consider the product for his portfolio.

“You would really have to feel comfortable with these three names. I know I wouldn’t, so I would not use it for my clients. A 55% barrier seems like a lot, but if you have a sell-off on any of those three names, you can hit the barrier without a doubt.

“It looks great to have such a high yield. But the question there is: are you compensated enough for the risk?

“You only find out the answer to this at the end. If you breach the downside barrier you’ll know that it wasn’t enough.”

Short’em

Steven Jon Kaplan, founder and portfolio manager of TrueContrarian Investments, gave no credit to the product.

“The temptation for me is always to sell these things short,” he said.

“The market cap of Tesla is the same as General Motors. It makes no sense. Are they selling as many cars? Are they generating as much profit?

“All these fake companies turn out to be profitable on the short side.”

Twitter, for one had struggled because the company had a hard time generating profits.

“With Twitter it’s hard to say,” he said. “In theory they could make money. But they haven’t figured out how. Maybe they could. I don’t know. If they can make money it’s hard to say how much.”

Old name, new play

The case of AMD was “a little bit more complicated,” he said.

“Here you’re dealing with a real company that’s been around for decades, since the 1970s. They have real products and real profits. They actually make money,” he added.

But for Kaplan, who defines himself as a value investor, the main issue with the stock was price.

“This is a stock that can easily move from $2 to $20 until it drops 90%. This pattern has been very common.”

Such a “pattern,” he said, is due to the “crowd” of investors trading the stock.

“The people who trade AMD tend to be the wild gambling types. A similar stock like Intel is boring. They don’t want to hold Intel forever. They’d rather get into this fast mover to double or triple their money.”

AMD is listed on the Nasdaq under the ticker “AMD.”

“AMD tends to be one of the most heavily shorted stocks from time to time,” he said. “It can easily go down 90% in one year.”

No hedge

Because the three underlying stocks were either overvalued or lacked profitability, Kaplan said he would not invest in the notes.

“There is a lot of hype around those stocks. But they can plunge in no time,” he said.

“If we’re on a bear market like 2000-02 or 2007-09, those stocks could easily see their shares drop 80% on average.”

The structure itself brought more risk into the product because the three underlying stocks were not part of a basket.

Kaplan said he did not like worst-of as a payoff type.

“It only takes one of them to go down, and of course you don’t know which one in advance,” he said.

“If it was a blended combination you could easily hedge it. I would buy the note, short the basket and collect the coupon regardless.

“But it’s not a blend of the three. It’s the worst one.

“I don’t think you get paid enough to take on that much risk.”

Credit Suisse Securities (USA) LLC is the agent.

The notes will settle on Friday.

The Cusip number is 22549JGQ7.

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