Autocallables 2024 Part I

By Craig McCann and Mike Yan

Introduction We have published extensively on structured products over the past 20 years. We published two papers dealing specifically with autocallable structured products - one in 2011 and one in 2015.[1] Since 2015, while we were focused on other research projects, the issuance of autocallable structured products has exploded, issuers have become more creative, the variety of products has proliferated and the potential for investor harm has increased dramatically.

This post begins a series of short posts bringing us, and you, up to date on the market for autocallable structured products. In this post, we document the dramatic increase in issuance over the past 10 years.

In our second post, we illustrate autocallables with examples linked to Lucid available here.

Our third post highlights a Silicon Valley Bank linked autocallable sold by Citigroup after the close on March 9, 2023 right before SVB fully collapsed. This note was worthless when the trades settled. The post can be read here.

Our fourth post explains how issuers have gamed an SEC requirement since 2014 that 424(b)s include issue date fair market values. It is available here.

Our fifth includes list of autocallables which have suffered large losses.

The Rise of Autocallables

Reverse convertibles were short term notes which paid a high coupon rate and returned their face value so long as the underlying stock price didn't decline below a threshold or trigger value during the term of the note. Reverse convertibles had embedded short put options, typically written on individual stocks. Issuers had an incentive to link reverse convertibles to volatile stocks since the more volatile the stock, the more profitable it was to issue reverse convertibles, other things equal. Many of the stocks underlying reverse convertibles issued in late 2007 and the first 8 months of 2008 declined substantially by late 2008 and early 2009 when the notes matured.

Reverse convertibles thereafter were subject to heightened regulatory scrutiny and carried a well-deserved stench making them hard to market, even to unsophisticated investors.

Autocallable structured products were the industry's response to bad name reverse convertible structured products acquired because of losses in 2008 and 2009. Rather than abandon the practice of attaching short put options to notes they issued, brokerage firms simply made it harder to identify the risky embedded options.

Table 1 and Figure 1 illustrate the dramatic rise in issuance of autocallable structured products. From 2007 to 2013, there were 889 issuances totaling $3.1 billion per year on average. From 2014 to 2018, there were 4,809 issuances totaling $11.6 billion per year on average. From 2019 to 2023, there were 11,122 issuances totaling $27.9 billion per year on average. $92.5 billion of autocallables have been issued in just the past three years.





The number of autocallable issues plotted in Figure 2 follow the same pattern as the total issuance plotted in Figure 1. The average issue size remains remarkably steady each year at around $2.5 million.



The eight most prolific issuers of autocallable structured products account for almost 90% of the total issuance. Morgan Stanley, Citigroup, JP Morgan, Goldman Sachs and UBS have each issued more than $20 billion of autocallable structured products. See Figure 3.



Some Key Features

At maturity, autocallables pay the note's face value if the price of underlying stock on the valuation date shortly before the maturity date is above a percentage, eg. 70%, of the underlying stock's closing price on the note's pricing (also trade) date. This threshold price or level against which the underlying stock price is assessed is sometimes referred to as the "knock-in level". If the underlying stock's price on the valuation date is below this threshold, investors suffer the percentage decline in the underlying stock from the pricing date to the valuation date.

Autocallables pay an above market yield through monthly or quarterly coupons until they are called or mature. The high distributions are styled coupons but are - just like the high coupons on reverse convertibles - partial compensation for the risk that an investor will receive the value of depreciated stock rather than the note's face value at maturity. For some autocallables, the coupon is only paid if the underlying stock remains above some percentage, eg. 50%, of the underlying stock's closing price, referred to as the "coupon barrier", on the note's pricing (also trade) date. These notes are described as "contingent" coupon notes.

Autocallables have one or more possible call dates prior to maturity. Typically, if the underlying stock's price is above its closing price on the note's pricing date the note is automatically redeemed by the issuer at par, sometimes with an accrued coupon. This rules-based call feature gives rise to the "auto"callable moniker although we consider some notes which are callable on periodic call dates at the discretion of the issuer to be effectively autocallables because issuers of both structures call the notes when the underlying stock has not declined as of a call date and therefore it is less likely contingent coupons would be zeroed out and maturity payoffs less likely to be reduced by stock losses than if the underlying stock had declined.

Autocallables can have multiple underlying stocks or stock indexes. If there are multiple underlying stocks, the return on the underlying stock with the lowest return from the pricing date to the coupon observation date, call observation date or maturity valuation date is used to determine whether the coupon is paid, the note is called or the investor receives less than the note's face value at maturity. These autocallable notes are "wort-of-basket" notes.

Next Up

Tomorrow we will post about the five Lucid linked notes below. The CUSIPs are hyperlinked to the 424bs if you are curious to read ahead.



The first note was linked to the worst performing of Lucid and Uber and was called on the first possible call date.

The second note was just linked to Lucid. It paid 5 coupons before Lucid's stock price dropped and the contingent coupons stopped.

The third note was linked to the worst performing of four stocks including Lucid. It paid 2 coupons before the contingent coupons stopped.

The fourth and fifth notes never paid a coupon because Lucid's stock price dropped below the coupon barrier before the first coupon observation date.

The last four notes were not called and are now virtually worthless because Lucid's stock price has dropped from around $40 when these notes were issued to less than $3. Investors are unlikely to get any coupons beyond the first few received already and like to get less than $10 per $100 face value when these notes mature later this year and early next year.

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[1] "Ex-post Structured Product Returns: Index Methodology and Analysis" with Geng Deng, Tim Dulaney, Tim Husson and Mike Yan, Journal of Investing, Summer 2015, Vol. 24, No. 2: pp. 45-58 and "Modeling Autocallable Structured Products" with Geng Deng and Joshua Mallett, 2011, Journal of Derivatives & Hedge Funds 17, 326-340.