Credit Suisse’s $15 review notes on oil services ETF show eye-catching coupon for single asset

By Emma Trincal

New York, June 11 – Credit Suisse AG, London Branch’ $15 million of 0% review notes due June 12, 2023 linked to the VanEck Vectors Oil Services ETF pay a coupon commensurate with the high volatility of the underlying, a lesser-known oil stock fund made of small and mid-cap companies.

But at least, there is only one reference asset and no exposure to the worst of several underliers, advisers noted.

The notes will be called at par plus a call premium of 17.1% per year if each underlying asset closes at or above its initial level on any annual review date, except for the final review date, in which case the call level will be 50% of the fund’s initial level, according to a 424B2 filing with the Securities and Exchange Commission.

If the notes are not called, the payout at maturity will be par plus the return.

Company risk

“Demand for oil has dropped. Any of those guys can go out of business, so you have to do your due diligence and look at what’s in the ETF,” said Steve Doucette, financial adviser at Proctor Financial.

Oil prices have recovered in the past two months, but U.S. shale drilling companies have heavily invested in new equipment and technologies putting them at greater risk when demand for oil and gas plummets as has been the case at the onset of the coronavirus outbreak.

The VanEck ETF tracks the performance of companies involved in the oil services industry, which include the rent of drilling rigs and the maintenance of oil and gas wells.

The fund is concentrated with only 24 holdings. The top three constituents – Schlumberger Ltd., Halliburton Co. and Baker Hughes Co. – make for a third of the assets.

High volatility

“The 17.75% coupon is attractive. But it’s a very volatile index,” he said.

The underlying fund has an implied volatility of 77%, putting the stock on par with names such as Uber Technologies Inc. and Tesla, Inc.

The underlying share price is down 53% for the year. The ETF lost three-quarters of its value in the first quarter (through March 18). In the past three months, however, it has regained 34%.

Risk-reward

“You certainly get in at a low. The 50% barrier looks good, but three years from now, who knows?” he said.

“You’re looking at a 17.75% coupon with a possible unlimited downside.”

Doucette brought up some concerns about valuation as investors only get a call once a year.

“If the index is down, the value of the note is down. You have to convince the client to wait for that call.”

Overall, Doucette said he probably would pass.

“I like to be in more broadly diversified indices.”

Bet on oil

Matt Medeiros, president and chief executive of the Institute for Wealth Management, said the deal had a fairly big size for an autocall.

“This is an interesting note,” he said.

“The sector is extraordinarily volatile and at one of the most volatile times in its history.

“There is an opportunity because you’re buying the asset class at a deep discount.

“If you’re interested in speculating in this sector, this would be a great way to go about it.”

The autocallable option on an annual observation basis was another positive element.

“I don’t mind callable deals in general. If you get called, your underlying exposure has appreciated the way you want it to. I think it’s fair, especially if you get called after a year,” he said.

Sporadic use

The VanEck Vectors Oil Services ETF is not among the most popular underlying for equity-linked plays in the energy sector.

Credit Suisse and to a greater extent UBS AG, London Branch have been the main issuers of notes linked to this ETF.

By far, the most popular underlying within the VanEck family but in a different industry is the VanEck Vectors Gold Miners ETF.

But for oil stocks, the use of the VanEck Vectors Oil Services is dwarfed compared to two other underlying funds comprised of larger-cap oil companies.

Since its inception in December 2011, the VanEck Vectors Oil Services has been used in 65 deals totaling $87 million, according to data compiled by Prospect News.

The Energy Select Sector SPDR ETF, which was launched in December 1998, led to the pricing of $2.1 billion in 402 offerings since 2004 when Prospect News began to track issuance of structured products.

But the top underlying fund for oil stock exposure has been the SPDR S&P Oil & Gas Exploration & Production ETF. Used in 656 deals, it gathered a total notional of $2.35 billion since its inception in June 2006.

J.P. Morgan Securities LLC and JPMorgan Chase Bank, NA are the placement agents.

The notes settled on Tuesday.

The Cusip number is 22552W6K6.

The fee is 0.55%.

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