Credit Suisse's Bares due 2019 linked to S&P 500 are aimed at conservative investors, bulls

By Emma Trincal

New York, Feb. 24 - The combination of an uncapped leveraged upside and a sizable buffer on the downside make Credit Suisse AG's 0% Buffered Accelerated Return Equity Securities due Feb. 28, 2019 linked to the S&P 500 index attractive to both cautious investors and bulls, sources said.

If the index return is positive, the payout at maturity will be par plus 127% of the index return. If the index declines by 25% or less, the payout will be par. If the index declines by more than 25%, investors will lose 1.3333% for every 1% that it declines beyond 25%, according to a 424B2 filing with the Securities and Exchange Commission.

Risk mitigation

"Each note can be used by a specific client. This particular note is ideal for a cautious investor who is concerned about the downside but still wants to have exposure to the market, somebody who's worried about investing at a high point in the market. No one knows where the S&P will be five years from now," said Tom Balcom, founder of 1650 Wealth Management.

"This is a good trade for a bullish investor because there is no cap. It's one of those things where you can dip a toe in the water without having to worry too much about the market downside. It works well as a risk-mitigation strategy. If you're bullish, the only thing you lose is the dividend."

The S&P 500 index has a 1.8% yield, which would represent 9% in unpaid dividends over the period without taking into account compounding.

Solid buffer

"You're foregoing dividends, but the 1.27 factor helps you offset that loss," he said.

"It's a perfect note if you are concerned about current market valuations and worry about a correction. The notes offer exposure to the market with leverage and no cap while providing a solid buffer on the downside."

Any loss in the index beyond the 25% buffer gives investors exposure to the decline in the S&P 500 on a leveraged basis.

Still, Balcom said, the 25% buffer does a lot to limit losses.

"If the market is down 30%, you only lose 6.67%. Despite the downside leverage factor, you're still better off than if you had a barrier or if you just owned the index. It's a very good tool for conservative investors who want to limit their downside exposure," he said.

Investors of course have to accept some less attractive terms as part of the tradeoff, he said.

"Buying these notes means that you don't mind the credit risk and you don't mind being locked in for five years," he said.

Uncapped, significant buffer

Steven Foldes, president and chief executive of Foldes Financial Management, said the notes offer positive and negative terms but that overall, the structure is attractive.

"You get an S&P exposure; five-year, which is long term; a 1.27 times leveraged upside, which is uncapped; and a significant downside buffer of 25% with a geared downside beyond that. I like this note," he said.

"Obviously, an uncapped exposure is a good thing. Five years is a long time, but having the uncapped return over that period of time is good. Plus, you have this 1.27 multiplier, which is very good.

"In addition, you have a lot of downside protection. It's a longer note, but 25% is a nice downside protection. Yes, beyond the 25% buffer, you're looking at a downside leverage factor of 1.33 to 1. But still, the protection is very good.

"I like the uncapped, the upside leverage and the fact that the downside buffer is significant."

While no one likes to have downside leveraged exposure, the size of the buffer offsets the negative aspect of the leverage, he said.

"The 1.33 downside factor is not quite as much of a negative since the 25% buffer is so substantial," he said.

"Besides, it's a buffer; it's not a barrier. I like that."

On the negative side, Foldes said that the five-year tenor has obvious implications in terms of credit risk exposure and liquidity, which investors should be looking at carefully.

Five-year exposure

"What I do not like about the notes is that you have credit exposure for five years, and that's not necessarily a positive. Typically, we don't like to go much longer than two to three years," he said.

"This is a five-year exposure, which is longer than we like. We have a five-year credit exposure with Credit Suisse - not great either, even though we've done business with them. We think their credit is fine. And you lose the dividends for five years."

However, "on balance," the notes are attractive, Foldes said.

"There are things we like and things we don't like. But we think the positives outweighed the negatives," he said.

"You have a leveraged exposure to an asset class which is uncapped. That's a big plus. And a 25% buffer is a very good feature."

Credit Suisse Securities (USA) LLC is the underwriter.

The notes are expected to price Tuesday and settle Friday.

The Cusip number is 22547QJG2.

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