Deutsche Bank’s autocallable step-up notes linked to DAX index to fit bullish, tactical play

By Emma Trincal

New York, March 24 – Deutsche Bank AG, London Branch’s 0% autocallable market-linked step-up notes due April 2018 linked to the DAX Index (Price Return) are a “tactical play on Europe, with Germany as the proxy market,” said Dean Zayed, chief executive of Brookstone Capital Management.

The DAX index is the German equity benchmark made of 30 selected blue-chip stocks traded on the Frankfurt Stock Exchange.

“This is certainly a creative and unique way to get exposure to the German stock market as the only other way to do so easily has been through ETFs,” Zayed added.

The notes will be automatically called at par of $10 plus a call premium of 9.5% to 10.5% per year if the index closes at or above the initial index level on either of the two observation dates, which are expected to occur in April 2016 and March 2017.

If the notes are not called and the final index level is greater than the step-up value, 130% of the initial index level, the payout at maturity will be par plus the index return.

If the final index level is greater than or equal to the initial level but less than or equal to the step-up value, the payout will be par plus the step-up payment, 30%.

If the final index level is less than the initial index, investors will have one-to-one exposure to the decline.

QE by extension

“A bet on Germany is a bet on some form of European recovery and a bet that their version of [quantitative easing] has similar results to the U.S. QE. As a tactical play, this note is highly attractive,” he said.

Zayed said he also likes the structure, in particular the combination of an autocallable feature and market-linked step-up payout at maturity.

“The three-year term, coupled with two opportunities prior to maturity to realize attractive returns, works well. The step-up payment and lack of cap are impressive,” he said.

The absence of any barrier or buffer is not seen as a major drawback.

“Even modest gains in the DAX work well with this note. One doesn’t buy this with a bearish slant at all since there is no protection,” he said.

Single country

Most investors looking for exposure to the European equity market tend to buy products linked to the Euro Stoxx 50 index, according to data compiled by Prospect News. Single-country plays are far less common.

For instance, so far this year, 139 deals based on the Euro Stoxx 50 index alone were brought to market totaling $1.25 billion, or more than 13% of the total issued in the United States. In comparison, only three offerings linked to the DAX index have priced this year, which represents only $9 million, according to the data.

“I am not sure how many investors wake up and say they want German market exposure, so this is likely sold through advisers that seek tactical German exposure as a result of a bullish tilt,” said Zayed.

Too sophisticated

For some buysiders, however, the structure is an obstacle.

“There are a lot of moving parts. It’s outside my realm of comfort in terms of showing these types of products to my clients. I really would need to be doing this type of things all the time to understand all the details,” a registered investment adviser said.

“It’s a really complex structure in terms of explaining it to a client. Unless you have a very sophisticated client, you’d have a hard time getting their attention. There are so many moving parts.

“If you had a very sophisticated client who would understand this market, fine, but then chances are they would probably be managing their own money.

“Also, investing in the DAX only is a very specific play. Non-U.S. markets are very sensitive to currency moves and to oil prices volatility. If somebody just wants income, why not invest directly in fixed income? And if they want growth with international exposure, why not go direct with a pure currency play?

“After all, this note is not really reducing your risk. You might as well go for real risk control or real growth.”

BofA Merrill Lynch is the agent.

The notes will price in March and settle in April.

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