Credit Suisse autocalls tied to Amazon, Lyft, Zillow come with big risk, big possible coupon

By Wendy Van Sickle

Columbus, Ohio, July 15 – Credit Suisse AG, London Branch’s contingent coupon autocallable yield notes due July 21, 2025 linked to the least performing of the shares of Amazon.com, Inc., Lyft, Inc. and Zillow Group, Inc. carry a loveably huge coupon and may make sense for investors with a risk-tolerant place in their portfolio but not as a long-term investment, according to sources.

The note features a head-spinning 29% contingent coupon, payable monthly if each of the stocks clears a 60% coupon barrier on the related monthly observation date.

A monthly automatic call feature will be triggered after three months if each underlying stock closes at or above its initial level on any observation date.

The payout at maturity will be par unless any stock finishes below its 50% knock-in level, in which case investors will be fully exposed to any losses of the worst performing stock.

Eyebrow-raising underliers

The note’s six-year term would be ideal if its underliers were indexes but gives pause when attached to a note linked to three volatile stocks, two of which are “very speculative,” Jerry Verseput, president of Veripax Financial Management, said.

“I love contingency notes when they’re based on an index, but obviously you don’t get a 29% coupon when it’s based on an index,” Verseput said, adding that each of Lyft and Zillow is a pretty big gamble.

“Essentially, this note is a bet that all three companies are still around in six years,” he said.

“Zillow had a net loss of $67.5 million in Q1 of this year, so they have a lot of work to do to get to profitability. Lyft isn’t close to profitable.”

Verseput speculated that online retail behemoth Amazon, seemingly a “safe bet,” was likely thrown into the mix to lull investors into forgetting the other two stocks were also bundled into the package.

Carl Kunhardt, wealth adviser at Quest Capital Management, agreed that Amazon, seemingly poised to “take over the world,” is not a particularly concerning underlier.

Meanwhile, Lyft just had its IPO in late March and is “still pretty new,” as Verseput noted.

While the ridesharing industry as a whole seems to be more than a short trip from getting to the point of being profitable, if ever, Verseput said the services have “completely transformed the way we get around,” so it seems likely they’ll find a way to survive.

And Kunhardt noted Lyft seems to have largely dodged the controversies that have tangled market peer Uber.

For its part, Zillow has been around since 2006 and had its IPO in 2011.

But, as Verseput noted, the online real estate database’s method of making money is more mysterious than that of most companies.

Of the two, Verseput supposed Zillow is probably “a little more dangerous” than Lyft.

In the past year, Zillow’s stock has closed at a high of $63.76 on July 18, 2018 and cratered at a closing low of $27.00 on Nov. 19, 2018.

“It hasn’t even been a year since it was down to the barrier level, so that thing could go back down pretty easily,” Verseput said.

A monthly chance to be paid

Unlike many of its structured-note contemporaries, these autocalls carry a monthly, rather than quarterly, coupon.

The ramped-up frequency is probably a bid to also ramp up investor participation, according to Kunhardt.

Kunhardt said the likelihood of seeing a return “right off the bat” in 30 days would probably draw in two times the participation than the same note with a quarterly payment feature.

This could be a short call

This note affords a relatively short period of call protection: three months versus the six months or even a year of protection offered by some structured notes. Additionally, once the three months is up, the autocall is set to be triggered monthly if each of the stocks at least clears its initial price on the related monthly observation date, unlike some notes that carry a monthly coupon but are still on an only quarterly autocall schedule.

This means that if each stock managed to clear its 60% coupon barrier for three months and its 100% autocall level in the third, investors would receive their principal plus 7.25% minus fees come October.

Verseput said that on a note with a 29% annualized coupon, he doesn’t see a possible call after three months as concerning.

“If I can make a fourth of [29%] in a quarter ... it just means your risk got taken off the table after three months,” he said.

As a financial planner, Kunhardt, however, said the likely short term is the main reason the note holds no allure to him, although he acknowledged it could be quite bewitching to an outright investment broker.

The way Kunhardt sees it is come the first call date on Oct. 16, “Boom, it’s gone.”

Kunhardt said the downside risk, while too great to sway him to the note’s favor, is negligible in his mind.

“None of the three [underliers] are extraordinarily volatile,” he said. “In the digital age, they’re about as brick and mortar as you can be without being brick and mortar.”

Odds are, he postulated, investors will get three monthly coupons and walk away in a quarter with an extra 5% after factoring in fees.

“This is purely a short-term kind of sugar high. It’s just not my business model,” Kunhardt said.

“I don’t want to keep going back every three months and redeploying new funds.”

Verseput, however, sees a place for the notes.

“I love the 29% yield; we’re bordering on ridiculous,” he said. “Twenty-nine percent says, ‘this is a pretty big gamble.’”

So what niche does this note fill as Verseput sees things?

“The part of your portfolio you want to dedicate to gambling.”

The notes will price on July 16.

Credit Suisse Securities (USA) LLC is the agent.

The Cusip number is 22552FNY4.

© 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.