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What's the difference between autocall and issuer call?

Le 12 août 2024 par Valentine Daries

Structured products are often associated with the early redemption mechanism. However, there are also products that do not include a redemption mechanism, and others that can be redeemed at the issuer's discretion.

🕰 Automatic early redemption

The majority of structured products include an automatic early redemption mechanism, also known as an autocall. Early redemption allows the investor to be automatically reimbursed when a certain condition is met—usually when the performance of the underlying asset is above the early redemption barrier.

This condition is established based on a reference level, known as the strike, which is determined at the product's launch. The performance is then observed on different observation dates relative to this initial level to see if the early redemption condition is met.

If the condition is met on an observation date, reimbursement is automatically triggered, and the investor recovers their initially invested capital along with the coupon(s). An early redemption that would result in a capital loss for the investor would not be an autocall mechanism but rather a mechanism called Stop Loss.

🏦 Issuer Call

Less common, issuer call is infrequent for equity-based underlying assets but is often used for structured products based on interest rates. This mechanism is not widely accepted in French life insurance, so it's preferable to choose a securities account or Luxembourg life insurance as the subscription envelope.

Observations are predefined dates on which the issuer has the right to redeem the product early or not. Unlike automatic early redemption, where the underlying asset's level is crucial, the issuer's own mathematical model determines whether the early redemption is favorable. Indeed, it's the evolution of interest rates—also known as the yield curve movement—since the product's launch that will trigger early redemption by the issuer.

On one hand, investors benefit from a higher coupon than they would have with a non-redeemable product by the issuer. On the other hand, if interest rates fall, the product will likely be redeemed by the issuer, who can refinance their debt at a lower level. A structured product consists of a bond portion and an optional component. When rates decrease, the current value of the bond that makes up the structured product increases, and early redemption by the issuer allows them to buy back this bond at its nominal value.

🤓 In summary

The majority of structured products include an automatic early redemption mechanism—also known as an autocall. Automatic early redemption allows the investor to be automatically reimbursed when a condition is met—most often when the performance of the underlying asset is above the redemption barrier. Less common, issuer-discretionary early redemption is infrequent for equity-based underlying assets but is often used for structured products based on interest rates. It's the evolution of interest rates—also known as yield curve movement—since the product's launch that will trigger early redemption by the issuer.

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