Autocallables

Autocallables, also known as autocallable notes or certificates, are a class of structured notes issued by banks. They combine a regular coupon with the possibility of automatic early redemption based on the performance of an underlying asset, such as a stock, index, or basket of assets.

A typical autocallable has a term of several years and a schedule of observation dates. On each observation date the underlying’s price is compared to a predefined barrier. If the barrier is met or exceeded, a coupon is paid and the note may be automatically redeemed at its notional amount, ending the contract. If the barrier is not hit, the note continues to the next date. If, at maturity, no early redemption has occurred, the final payoff is linked to the ending price relative to the initial level, often with additional barriers or floors that cap or limit returns.

Payoff and risk: In many designs, if there is no autocall, the investor receives a redemption at maturity that is linked to the final price of the underlying, possibly with a cap on upside. Some autocallables offer partial principal protection, but most do not guarantee full repayment of principal and are subject to the issuer’s credit risk. The actual return can be lower than the coupon payments and may be zero or negative if the underlying performs poorly.

Risks and considerations: Autocallables are complex, path-dependent products with liquidity risk and exposure to the issuer’s solvency. They require careful assessment of the underlying, barriers, fees, and the investor’s risk tolerance and investment objectives. Suitability hinges on an understanding of how early redemption, barriers, and credit risk interact to determine final outcomes.

Variants and market context: They can be linked to a single underlying or multiple assets, and may include various features such as knock-out barriers, caps, and baskets. They are commonly issued in Europe and other markets as a way to offer enhanced coupons while transferring more risk to investors.