Credit Suisse’s autocallables on oil services ETF offer deep value for risk-tolerant investors

By Emma Trincal

New York, Nov. 25 – Credit Suisse AG’s 0% market-linked securities due Nov. 29, 2022 – autocallable with contingent downside linked to the VanEck Vectors Oil Services exchange-traded fund offer a chance to secure a double-digit return based on the view that an already deeply depressed underlying fund will not decline further.

The notes will be called at par plus an annual call premium of 14% to 16% if the fund closes at or above its initial level on any annual observation date, according to a 424B2 filing with the Securities and Exchange Commission.

At maturity, if the notes have not been called, this means that the fund’s final level is below its initial level. In that case, the payout at maturity will be par unless the fund finishes below its 60% threshold price, in which case the payout will be par plus the return of the fund with full exposure to losses.

Memory feature

“This is a very interesting deal,” said Steven Foldes, vice-chairman of Evensky & Katz/Foldes Financial Wealth Management.

“Not only are you getting 15% annualized, but in the event you’re not getting it in the first year, you can achieve this return in the second or last year given the cumulative nature of this premium.”

Indeed, the structure shows a “memory” feature, allowing investors who miss a call to capture the premium on the next or last annual observation date. For instance, assuming a 15% call premium, investors would receive 30% if called on the second annual observation date and 45% on the third observation date, which is just a week prior to maturity.

“Fifteen percent a year is a nice premium,” he said.

Foldes said he also liked the issuer’s credit. At 51 basis points, Credit Suisse’s five-year credit default swap rate is in line with some U.S. banks, such as Citigroup (50 bps) and Morgan Stanley (55 bps), according to Markit.

The 2.8% fee, however, was “a little bit on the high side,” he said.

A value dream

But what was really attractive was the current valuation of the underlying fund.

The VanEck Vectors Oil Services ETF tracks the performance of U.S.-listed companies involved in oil services to the upstream oil sector, including oil equipment, oil services or oil drilling. The sector has been relatively unpopular for some time.

The fund’s top three constituents are Schlumberger Ltd., Halliburton Co. and Baker Hughes Inc.

The ETF closed on Monday at $11.97 a share, only $1.21 above its 52-week low. The fund is down 14.5% for the year.

Since January 2017, the ETF lost two-thirds of its value. During the same period, the S&P 500 index climbed 42%.

“If you are a value buyer and think the fund will bounce back after three horrific years, this note is particularly attractive,” he said.

“An asset class that lost two-thirds of its value in the midst of a bull market ... that’s very unusual. Any value investor would spot right here a terrific buying opportunity.

“This fund is due for a bounce back.”

Barrier

If the bet turns out to be wrong, the barrier is deep enough to provide protection, especially at those depressed levels, he said.

“This fund is so undervalued. Even if you didn’t get called, the 60% barrier is likely to provide enough protection given the depressed value of the fund, particularly on a point-to-point basis.”

Despite those attractive features, Foldes said he would not consider the notes.

“This is not something we would buy for a client, however, because we do not invest in sectors. We prefer more diversified exposures through broader equity indices,” he said.

“But this is quite a creative note. We like that there’s a significant premium to be earned.

“The cumulative aspect of the call premium is particularly attractive.

“I like the notes, but it obviously comes with a significant amount of risk.”

Poorly performing ETF

Carl Kunhardt, wealth adviser at Quest Capital Management, did not find any appeal in the deal because of the underlying ETF.

“This is an overly concentrated, poorly rated fund with a terrible track record,” he said.

He was referring to the Morningstar Rating, which ranks funds from one to five stars in increasing order of quality based on a proprietary measure of risk-adjusted return.

“You’re gambling with this thing. I wouldn’t touch it,” he said.

“It’s been down at least 20% every year since 2014 except in 2016. To say that it’s had a terrible performance is an understatement.”

Bearish on oil

Kunhardt added that he is not bullish on oil in general.

“Oil hasn’t done so well and so oil services of course are not a strong sector,” he said.

“There is an oil glut in the world. OPEC is not going to reduce its output, and the U.S. is the top oil producer in the world.

“While Iran is out of the picture right now, it’s not enough to make up for the high supply problem we’re seeing worldwide.

“It may be a value play for some, but I’m more on the cautious side.

“It is known that value investors love to catch falling knives on the way down. With such a bad performance year after year, you can’t tell what’s going to happen to your hands.”

Wells Fargo Securities, LLC is the agent.

The notes will settle on Nov. 29.

The Cusip number is 22551N6G6.

© 2015 Prospect News.
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