10.60% p.a. Multi Barrier Reverse Convertible on Givaudan, Kuros Biosciences & Novartis

Takeaways

• Expected annualized return ≈ 6.29%, i.e. below the 10.60% headline coupon, because the coupon is only fully earned when the product is not called early and no capital is lost; in the loss scenarios the received coupons do not fully offset the principal shortfall.
• Probability of a negative return ≈ 13.40% of simulations.
• 99% VaR (1-year) ≈ −32.48% — in the worst 1% of outcomes the annualized loss is about one-third of capital, reflecting the worst-of delivery feature.
• Chance of beating the risk-free rate ≈ 86.61%.
• Expected holding period ≈ 14.6 months (1.22 years); there is a 63.86% chance the note runs to full maturity and a 36.14% chance it is called early.

• If no barrier event occurs — none of the three shares ever trades at or below 55% of its starting level at any time during the ~18-month life — the investor receives par (100%) back at maturity plus all coupons. → Best case.
• If the 55% barrier is breached and the worst share finishes at or above its starting level, the investor still receives par.
• If the 55% barrier is breached and the worst share finishes below its starting level, the investor receives the actual worst-performing shares (or the cash equivalent), i.e. suffers the full decline of that single worst stock. → This is where capital is lost.
• Issuer call: on any quarterly observation date the issuer may redeem early at par plus the coupon. Modelling assumption: the term sheet gives the issuer discretion (no explicit trigger level), so we model the call as occurring when the worst share is at/above its starting level — the economically rational call point.

• Expected total return over the realized holding period ≈ 6.91% (average holding ≈ 14.6 months).
• Expected annualized return ≈ 6.29% (mean of per-simulation annualized returns).
• Because a sizeable share of paths end early (36% called), some simulations have short holding periods; for holdings under 12 months returns are annualized linearly, so individual annualized figures can look extreme. The figures above should be read together with the ~14.6-month average holding period and the 6.91% average total return.
• The mean (6.29%) is well below the median (10.34%): the typical outcome is a full coupon-like return, but a heavy left tail (capped upside, full worst-of downside) pulls the average down.

Potential advantages

• High fixed coupon (10.60% p.a.) paid quarterly regardless of how the underlyings perform, as long as the note is alive.
• Meaningfully lower loss probability than the underlying basket (≈13.4% vs ≈29.3%): the 55% barrier plus the "par even after a breach if the worst share recovers" rule protects the majority of paths; ~86.6% of simulations beat the near-zero CHF risk-free rate.
• Downside cushion frequency: in ~63.9% of paths the note runs to maturity and in ~36.1% it is called early — in both cases the investor typically keeps a full coupon stream or par redemption.
• Positive carry in a low/zero-rate CHF environment, with the coupon far above cash rates.

Points to be aware of

• Upside is capped: the investor can never earn more than par plus the fixed coupons; all upside of the shares above their starting levels is forgone.
• The worst-of structure concentrates tail risk: the 99% VaR (−32.48%) is worse than that of the equal-weight basket (−19.31%). A single name — here the small-cap biotech Kuros Biosciences, by far the most volatile of the three (~65% realized annualized volatility) — dominates the loss outcomes because the investor is delivered the whole worst performer, not an average.
• Barrier is observed continuously for ~18 months, so an intraday/intra-period dip below 55% (even if it later recovers) removes the "par" protection; the coupon does not rise to compensate for a breach.
• Issuer call risk: the note is likely to be called early (≈36% of paths, generally when the shares are strong), capping the duration of the attractive coupon precisely when markets perform well.
• Credit risk of the issuer (Leonteq) applies to all payments.