Credit Suisse’s knock-out notes linked to S&P 500 offer long-term play with protection, no cap

By Emma Trincal

New York, Nov. 12 – Credit Suisse AG, London Branch’s 0% knock-out notes due Nov. 16, 2020 linked to the S&P 500 index combine unlimited leveraged participation on the upside with some downside protection, two features that should appeal to bulls who want to remain cautious, a financial adviser said.

However, not every investor is willing to commit to a five-year investment period, another adviser noted, adding that the barrier may be breached too easily over the term.

A knock-out event will occur if the final index level is less than the initial index level by more than 37.5%, according to a 424B2 filing with the Securities and Exchange Commission.

If a knock-out event has not occurred and the final index level is greater than the initial level, the payout at maturity will be par plus 130% of the index return.

If a knock-out event has not occurred and the final index level is less than or equal to the initial level, the payout will be par.

If a knock-out event has occurred, investors will be fully exposed to the index’s decline.

Protection

Matt Medeiros, president and chief executive of the Institute for Wealth Management, said he likes the deal.

“With the S&P 500, it’s pretty safe to say it’s generally the core of most portfolio allocations, so having a five-year hold is not that much of an issue, and it seems that the credit of the issuer at this point is stable,” he said.

He sees the nearly 40% contingent protection as valuable.

“This note is an interesting opportunity to protect your S&P allocation for the long haul,” he said.

“Even if you bought this at the height of the stock market crash of 2008 or even before, after five years you wouldn’t have breached that barrier.

“Conversely the enhancement on the upside without a cap is also attractive.”

Versus fund

The notes carry a 3% fee, according to the prospectus.

Medeiros said he would assess the cost by comparing the notes to a long-only investment, such as the purchase of an exchange-traded fund tracking the returns of the S&P 500 index.

“If you’re just comparing the fee to an ETF, it’s going to be a little bit more expensive,” he said.

“However, you’ll get rewarded because of the upside enhancement. It’s a small price to pay in order to have protection on the downside and return enhancement on the upside.

“This note seems like a very decent alternative to being long the index fund.”

Too long

A buysider had a different view due to his more bearish long-term market outlook.

“In general, five years is way too long for a structured note. In my opinion, the upside potential on the S&P is very limited. There’s much more exposure on the downside,” this buysider said.

“We may not have a big crash, but over five years we may see stocks trading flat or lower for some time.

“I don’t see much upside. Maybe in the short term you could see some gains, but over five years, I think it’s more likely that the S&P will be lower.”

Recession risk

As a result, this buysider said he would much rather see a buffer instead of the 37.5% barrier.

“It’s just too easy to lose 37.5% over five years if we get a recession,” he said.

“Not having a cap is good if you have growth. I don’t see the lack of a cap being an add here because I don’t think it’s going to matter.

“And there is definitely some risk for the downside based on the economy with the possibility of a recession and the risk of deflation.

“In other words, I don’t see the note being all that appealing.”

J.P. Morgan Securities LLC and JPMorgan Chase Bank, NA are the agents.

The notes will settle on Monday.

The Cusip number is 22546VQG4.

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